How Cash Home Buyers Calculate an Offer

Ask five buyers how they got to a number and you may get five answers, or none at all. So: how do cash home buyers calculate offers? The method underneath is ordinary arithmetic, and you can rebuild most of it yourself using free county records. This post walks each line of it. It is part of our guide to selling a house as-is in Chicago.

A number presented whole is one you cannot argue with. A number presented in parts is one you can check, and correct, line by line.

It starts with what the house would sell for after repairs

A buyer is not pricing your house as it stands. They are pricing what it would sell for once finished, then subtracting their way back to today. Everything else here is a subtraction from that first figure.

Buyers usually call that figure the after-repair value. It is an estimate of what a fixed-up house on your block would fetch on the open market, and it is the single most important assumption in the offer. Move it, and the offer moves with it. So the first question to ask any buyer is: what did you use as the finished resale value, and which sales did you get it from? A vague answer leaves the conversation with no anchor.

Comparable sales, and how to look them up yourself

A comparable sale, or comp, is a recent sale of a similar house nearby. The closer it is on every axis, the more it tells you. Strong comps are:

Close by. The same block beats the same ZIP code. Values change street to street in Chicago in ways a wider average hides.
Recent. A sale from a cooler part of last year describes a different market than one from last month.
Similar in the things that cost money. Square footage, bedrooms and bathrooms, style, age, basement, parking, lot size.
Similar in condition. A finished house is not a comp for a project house without an adjustment, and that adjustment is where a lot of quiet disagreement hides.

Weak comps to watch for: a sale between relatives or related companies, a sale out of a bank, and any sale where the price looks unconnected to everything around it. Those are not arm's-length prices and should not anchor your number.

Two free public sources let you check a buyer's work:

The Cook County Assessor's address search returns the recorded characteristics of a parcel: square footage, year built, property class, and the current assessment. It is the quickest way to find out whether a comp really is the same size as your house.
The Cook County Clerk's recordings office holds recorded deeds and the documents behind transfers. Recorded sales are public, and anyone can look them up.

One caution, because it trips people up constantly: an assessed value is not a market price. It is produced on its own schedule for taxation and can sit a long way from what a buyer would pay. Use the assessor for characteristics, and recorded sales for price. Our Cook County page sets out which office holds what.

The repair estimate

Two different numbers get confused here. There is what the work would cost you, hiring a contractor once. And there is what it costs a buyer who does this regularly, with their own trades and pricing. The second is usually lower per line and larger in total, because a buyer prices the whole scope rather than the visible parts, and adds a contingency for what shows up once a wall is open.

The items that move an offer most are rarely the ones a seller expects:

Roof, gutters and anything to do with water getting in.
Foundation, grading and the basement.
Electrical service, panel and old wiring, which also affects whether a retail buyer can get a loan.
Plumbing, including the water service line and the waste stack.
Heating, cooling and the water heater.
Anything structural, and anything that was built without a permit.

Paint, carpet, fixtures and a dated kitchen move it least. They are visible, so sellers weight them heavily and buyers do not. Unpermitted work is its own line, because the fix can mean opening finished work and going back through the building department.

Ask for the repair estimate as a scope, not a single figure. A buyer who can hand you a list of items has done the work. A buyer who cannot is guessing, and a guess carries a bigger contingency, which comes straight out of your price.

Holding, selling and closing costs

Between buying your house and selling it again, a buyer carries it. That carry is real money and belongs in the offer:

Property taxes for every day they own it. The Cook County Treasurer publishes what a parcel is billed, so this one is checkable.
Insurance, which costs more on an empty house under renovation than on an occupied one.
Utilities kept on for the trades, plus lawn, snow and securing the property.
The cost of the money, borrowed or their own, sitting in your house instead of somewhere else.

Then there is selling it again: a broker commission, seller-side closing costs, transfer stamps, and the credits the eventual buyer asks for after their own inspection.

At your own closing there are title charges, recording and prorated taxes. Who pays which of those is written into the contract rather than fixed by custom, so read that section. If money is owed and recorded against the property, the title company settles it from the sale proceeds and the seller receives the balance.

The buyer's margin, stated plainly

The last subtraction is the buyer's profit. We would rather say that plainly than dress it up: a buyer is putting capital at risk on an estimate, and the margin is what pays for the capital, the time, and the chance that the repair figure is wrong.

What makes that margin wider or narrower: how confident the repair estimate is, since a house nobody has been inside carries more unknown than one walked with a contractor; how quickly finished houses sell on that block; how long the money is committed; and whether anything on title is unresolved.

You will find a well-known rule of thumb quoted around this industry. We are not publishing one here, and we would treat it with suspicion coming from anyone else, because a rule of thumb is a statement about an average house, and you are selling a specific one. Ask about your house.

How to check an offer against a listing

The offer is only half the comparison. The other half is what you would net on the open market, and two free inputs get you there: a written opinion of value and net sheet from a licensed broker, and a written repair estimate from a contractor on the same scope the buyer used. The net sheet is the part that matters, because it lists the commission, the closing costs and the credits that come off the top.

Then put the two side by side and compare the bottom lines, not the headline prices. That comparison is the subject of the pillar guide: compare the net, not the headline price.

Whichever way it lands, the same discipline applies to the buyer as to the broker: check out who you are dealing with before you sign.

Frequently asked questions

Why is a cash offer lower than the asking prices I see on my block?

Those are asking prices for finished houses, and asks are not sales. Subtract the repairs, the carry, the resale commission and the buyer's margin, and you land well below the sign in the window. Whether it is a good deal depends on your net after listing costs, not on the gap between the headline numbers.

Can I ask a buyer to show me their comparable sales?

Yes, and a reasonable buyer will. Ask for addresses and sale dates rather than a summary, so you can check them against the recorded sales and the assessor's characteristics yourself. If a buyer will not name the sales they used, that is worth knowing before you go further.

Does a higher offer always mean a better outcome?

Not necessarily. Compare the contingencies, who pays which closing items, what happens to earnest money if the deal ends, and whether the party signing is the party who will close. A lower number with fewer ways to fall through can be worth more than a higher one with an escape hatch in it.

How we price our own offers

We use the same five lines, and we will walk you through ours on your house: the finished value we used, the sales behind it, the repair scope, the carry and the margin. Our how we price a home page sets out the method, and you are welcome to take our arithmetic to a broker or an attorney and check it. There is no fee to get a number and no obligation to accept it.

About this article: it is general information written by a home buyer, not by a lawyer or a housing counselor. Fair Value Investments (a d/b/a of Probate Professionals of America, LLC) is a private real-estate investor and home buyer purchasing property for our own account. We are not a licensed real estate broker, not a law firm, not a lender, and not a government agency, and nothing here is legal, tax, or financial advice. Any offer is made at our discretion after we evaluate the property; a cash offer, if made, may be below market value. You are free to consult your own attorney, tax advisor, or a licensed real-estate professional before deciding. There is no fee to receive an offer and no obligation to accept.