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How cash offers are priced

Every cash offer starts from what the house will be worth fixed up, then subtracts repairs, holding costs, selling costs and the buyer's margin. Here is the formula and why two offers on the same house differ by tens of thousands.

01Buyers price backwards from the resale

A cash buyer does not start from what your house is worth today. They start from what it will sell for after they are done with it, the after-repair value, and work backwards. From that number they subtract the repairs, the cost of owning the house while they fix and sell it, the cost of selling it, and the profit that makes the whole exercise worth their time. What is left is your offer.

The same formula produces very different numbers depending on who is using it. An investor who flips needs a wide margin to cover risk. An investor who rents can pay more, because the resale is years away. An iBuyer prices from a model, resells with light cosmetic work, and takes its margin as a fee instead of a discount.

02A worked example

Take a house that would sell for about $400,000 once the roof is replaced and the kitchen updated. The flipper's version of the math and the iBuyer's version land far apart.

Backing into an offer on a $400,000 after-repair house
FlipperiBuyer
After-repair value$400,000$400,000
Repairs$40,000 to $60,000$5,000 to $15,000 as a credit
Holding costs, 3 to 6 months$8,000 to $15,000$4,000 to $8,000
Resale costs$24,000 to $32,000$20,000 to $28,000
Margin or fee$40,000 to $60,0005 to 7% service fee
Offer to you$240,000 to $290,000$340,000 to $370,000 before fee

The flipper's number is roughly the old 70% rule: pay no more than 70% of after-repair value minus repairs. Flippers in competitive markets stretch to 75 or 80%. iBuyers price closer to 90 to 95% of current value, then take the fee and the repair credit on top, so the net lands somewhere around 85 to 90% once everything is counted.

03Why two offers differ by tens of thousands

  • Different after-repair values. One buyer thinks the fixed-up house sells for $400,000, another thinks $380,000. That $20,000 flows straight to the offer.
  • Different repair estimates. A buyer with their own crew prices a roof at $12,000. One who subcontracts prices it at $18,000. A buyer who has not seen the house pads the number to protect themselves.
  • Different exits. A landlord does not need to resell, so the resale costs and much of the margin disappear from the math.
  • Different margins. A buyer with ten houses in progress takes a thinner margin on the eleventh. A buyer who needs this deal takes a thicker one.
  • A wholesaler in the chain. If the person making the offer plans to sell the contract to an investor, their fee comes out of your price before the investor's math even starts.

None of this is visible from the offer letter. It is why a second and third offer are worth the phone calls, and why the listing estimate matters: it is the only number in the whole exercise that is not someone else's margin.

04How to read an offer against this

Ask the buyer for their after-repair value and their repair estimate. A serious buyer will tell you both, because they want you to understand the number. If the after-repair value is in line with recent sales nearby and the repair list matches what you know about the house, the offer is fair for what it is. If either number is far off, you are looking at a lowball or a guess, and either way the house deserves another look from someone else.

Keep in mind that your own number for the house carries error too. Why your equity is a range explains how much a valuation can miss by, in both directions.

See where you actually land

Your address, a value and equity range, then the paths that fit. About a minute, and no credit check.

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Related

  1. Cash offer vs. listing: what you actually netA listing brings more, then gives some of it back in commissions, repairs, concessions and carrying costs. A cash offer brings less and gives almost nothing back. Here are the net numbers side by side.
  2. Why your equity is a range and not a numberEquity is a modeled value minus a modeled lien. Both sides have error, so an honest number is a range, not a single dollar figure.
  3. Cash offer red flagsMost cash buyers are what they say they are. The ones who are not share a few habits: contracts they can assign, long inspection periods, tiny deposits, and prices that drop after you sign. Here is what to look for.

This path, in order

Cash offer: the full guide

  1. 01When a cash offer is the right call, and what it costs youA cash offer is fast and certain. You skip repairs and showings. You also net meaningfully less than a traditional sale.
  2. 02How cash offers are pricedYou are here
  3. 03Cash offer vs. listing: what you actually netA listing brings more, then gives some of it back in commissions, repairs, concessions and carrying costs. A cash offer brings less and gives almost nothing back. Here are the net numbers side by side.
  4. 04The cash offer timeline, from offer to fundedMost cash sales close in 7 to 21 days. Here is what happens in each stretch, how your mortgage and any second lien get paid, when you have to be out, and what can slow it down.
  5. 05Taxes when you sell, in plain termsMost people who sell the house they live in owe no federal tax on the gain, up to a limit. Here is the shape of the rule, what basis means, and how inherited houses differ. The outline, without the advice.
  6. 06Cash offer red flagsMost cash buyers are what they say they are. The ones who are not share a few habits: contracts they can assign, long inspection periods, tiny deposits, and prices that drop after you sign. Here is what to look for.