How We Determine Your Offer
We get questions as to how we come up with our offer. This is in-depth breakdown of how we determine what we can offer on a property. Now, this is not the only way we can determine our offer. Our offer calculation can be different based on your situation and timeline, as well as what we plan to do with the property after buying it (remodel/sale, rental, resale to investor). A fast sale for you, and a remodel/sale for us is probably the most common, so I will show you how we would calculate this one.
One way we calculate offers
Your Offer = (ARV) – (Cost of Repairs) – (Selling Costs) – (Holding Costs) – (Profit From Resale)
For Seller/Owner Finance
We can discuss seller finance if you are interested
For A Rental Property
We use a different calculation that is based on the rent to cost ratio
Lets Look At Each Variable
ARV – the ARV is the “After Repair Value”. This is what the house would go for, if it were fully remodeled to 2019 standards. The ARV is determined by running comps on properties.
Cost of Repairs – this is pretty straightforward as to what it means, but there is a key point that needs to be made. This is “Our” cost of repairs. This means we are following our standard to get the house HGTV ready. It is important to understand there is a big difference in cost of painting a room and changing the carpet, vs. painting, texturing, adding thick baseboards/crown molding and putting down hard woods.
Selling Costs – this includes the realtor commission, closing costs, and a home warranty. While you don’t have a to pay a realtor fee, we will have to after we remodel the home.
Holding Costs – as soon as we buy the property, we begin paying all those things you were able to stop paying – Taxes, insurance, utilities, etc. The longer we have to keep the property before selling, the more we have to pay in holding costs.
Profit from Resale – As much as we enjoy volunteering, in our business we have to make a profit or we won’t be able to do it for very long.
Ready For An Example?
Realtor & Remodel vs. Brilliant Day Homes
Disclaimer: This example is based on a real property and actual cost estimates. In other cases, there can and will be things that are different. The most important thing to understand is that the variables in the scenarios are consistent throughout the example.
- The house was built in 1985 and really hasn’t had much done to it except for paint and carpet over the years.
- Comps show houses like it have sold at $110K in a similar condition but sat on the market for a while
- Comps show the house would be worth $150K if it were remodeled to 2019 standards (open concept, stainless appliances, wood floors, granite, etc.)
- For you to get it to 2019 standards, you would have to put $25K into it.
Before we start comparing, we need to determine the holding costs.
Holding Costs ($110K house paying 2.39% taxes)
- Taxes – $219.08
- Insurance – $67.00
- HOA – $20.00
- Utilities – $250.00
- Mortgage – $527.60
Total = $1083.68 per month
To make this example cleaner, we will round the holding costs to $1K per month.
We will also need to have the selling costs
- Realtor commission (6%) = $9K
- Closing Costs (2%) & Home Warranty = $4K
So the selling costs will be $13K
Realtor & Remodel
Let’s find out how much you would walk away with.
- You speak with a realtor, they tell you they can get you $150K for your property if you fixed it up.
- You contact a contractor to update the house.
- You pay the contractor $25K. He remodels the house and finishes in on time in the two months he promised.
- You then list your property at $150K. It gets an offer the first day on the market for full price.
- You go to the inspection period and there are no problems.
- You close on the property 60 days after you first listed it.
- The house sells. You paid the repair costs, holding costs and selling costs.
- Sold price = $150K
- Repair Costs = $25K
- Holding Costs=$4K (It took 4 months total)
- Selling Costs=$13K
Our ideal scenario, after 4 months you are walking away with $108K. Not too bad.
Brilliant Day Homes
Now we are going to run the numbers for us to see how we determine your offer.
- Because we already work with contractors, and we know how to setup a scope of work and a draw schedule the remodel will cost us $15K, where it cost you $25K.
- The a scope of work and a draw schedule is used for our contractors to ensure that they meet their projected deadlines. We work with them to schedule tasks, and buy all materials so that they can focus on the work. This means we can be done in only one month, where it took two for you.
- Then we factor our necessary profit for the deal and taking all the risks. This will vary depending whether or not we are going to keep the property as a rental or immediately sell it. In this case lets say our necessary profit = $19,000.
- ARV = $150K
- Repair Costs = $15K
- Holding Costs=$3K (It took 3 months total)
- Selling Costs=$13K
- Profit From Resale=$19K
Your Offer = (ARV) – (Our Cost of Repairs) – (Selling Costs) – (Holding Costs) – (Profit From Resale)
Your Offer = $150K – $15K – $3K – $13K – $19K = $100K
So our offer to you would be $100K
A Closer Look
Realtor & Remodel = $108K
Brilliant Day Homes = $100K
In this case we would be offering you $8,000 less for your property than you would get if you spent the 4 months doing the work instead.
But what if everything didn’t go as planned in the Realtor & Remodel scenario…
- What if the contractor just left with your $25,000 and didn’t do any work?
- What it the contractor did poor quality work and the house didn’t appraise for $150,000. What if it was only $135,000?
- What if the house didn’t sell the day it went on the market, what if it sat for a month or two before getting any offers?
- What if there was a foundation problem or some other major issue found in the inspection? $$$
We take these risks, so you don’t have to.
Get Your Free Offer NOW!
What If You Decided To List As-Is
Listing As-Is has it’s own set of challenges. Lets take the same house and see how much you could get.
- Selling price = $110K
- Repair Costs/Cash Concession = $10K
- Holding Costs=$4K (It took 4 months total)
- Selling Costs=$10K
Listing a house like this is more difficult to do if someone is using a bank loan. You will likely need to fix certain problems found in an inspection report or lower the cost of the property. If the person offered you cash, they aren’t going to offer $110K. They would offer you $100K.
For the sake of simplicity, lets say that you ended up having to replace the HVAC system and a few minor things that totaled $10K
After 4 months your final take home would be $86K
How Some Other Companies Calculate Their Offers
We will call this company – Home Buyer A
Your Offer = (0.75 * ARV) – Cost of Repairs
Your Offer = (0.75 * $150K) – $15K =$98K
You are probably thinking $98K is almost the same number that I calculated earlier. Why not just use this equation? – Not using enough variables makes you less certain about the numbers you are working with. When people are less certain, they tend to be more conservative and offer less.
Some companies also add an additional profit variable to get on the front end.
We will call them – Home Buyer B
Your Offer = (0.75 * ARV) – Cost of Repairs – Additional Profit
Your Offer = (0.75 * $150K) – $15K – $10K=$88K
- Realtor & Remodel = $108K – Sold in 4 months
- Brilliant Day Homes = $100K – Sold in as little as 7 days
- Home Buyer A= $98K – Sold in less than 30 days (assuming they can close)
- Home Buyer B = $88K – Sold in less than 30 days (assuming they can close)
- Sold As-Is = $86K – Sold in 4 months
The results are typical of what you see in the industry. Taking the time to fix up and sell your house can sometimes get you the most money. The question is: Is $8,000 more worth 4+ months of stress and uncertainty? Selling your house to a quality home buying company like Brilliant Day Homes will give you a quick sale for a slightly lower profit. You decide if you want to trade time and stress for possibly a little more money. Selling your house As-Is on the market, or selling to someone who wants an excessive profit will end up putting you in a similar position with how much you walk away with.
Ready To Get Your Cash Offer?