How a Cash Offer Works - From an Investment Company
One of the most common questions we get is "How does a cash offer work?". There is a lot of confusion out there about how investment companies work and if we are able to provide a fair offer, so let me dive right into how this works.
All investment companies run with basically the same formulas for buying properties as-is and closing with cash. The investment company is taking on all responsibilities related to the property including repairs, title issues, back taxes, maintenance, insurance, utilities, city fines, etc and generally the company is waiving the need for inspections and appraisals. This creates a simple and fast process that can close in as little as 7 days, allowing the seller to cash out of the property quickly with a hassle-free sale.
Let's start with an example property which will demonstrate how an investment company calculates the cash offer price.
First off, a retail value will be calculated. This is the maximum amount that the property could be worth based on 3 similar properties in the area that have been fully renovated to modern standards (modern paint, modern flooring, stainless steel appliances, granite counters, new cabinets, new windows, etc). This retail value is similar to the houses you would see on HGTV. The investment company will plan to fix the house up to this level and sell at this retail value.
Example of an average entry-level house in the Minneapolis Metro Area:
Retail Value: $200,000
Repairs: $30,000 (Range of $20,000-$80,000)
Closing Costs: $8,000 (4%, paid by investment company)
Holding Costs: $6,000 (3%, paid by investment company)
Realtor Commissions: $10,000 (5%, paid by investment company)
Return on Investment: $20,000 (10%, expected profit on the project)
Risk Margin: $5,000 (2.5%, ranges from 1 to 5%)
Cash Offer Price: $121,000, as-is sale, closing in as little as 7 days.
If a higher price is desired there are a few options.
Option 1: $131,000, 6 month contract for deed. The investment company will provide a down payment of $5,000 to $10,000 quickly (7 days), and pay the remaining balance within 6 months when the house is re-sold.
Option 2: $170,000, long term contract for deed, 5-10 years. The company will provide a down payment of $5,000 to $10,000 quickly (7 days), and pay the remaining balance with monthly payments for 5-10 years. This option will net the highest price for the seller, even higher than an MLS sale. With this option the seller doesn't pay any expenses for repairs, closing costs, commissions, etc. and sells as-is. It is a convenient option and results in the highest possible sales price for the seller with no fees. Additionally, this type of sale minimizes incomes taxes on the sale commonly resulting in zero income taxes owed.