One of the most common questions home sellers have is, how strong is a cash offer compared to an offer from a retail buyer using a traditional bank loan? Is a cash offer going to be fair and reflective of the home’s actual value, or will it just be a lowball so the buyer can buy low, sell high?
Today, we’re bringing you those answers.
Cash Offers: The Numbers
To understand how a cash offer compares to a “traditional” offer, we have to understand how people come up with these cash offers to begin with.
Typically, folks pay cash for houses that are going to need some work done to them. The reason is that such houses may not qualify for a traditional bank loan, and even if they do, a traditional buyer may not want to put the sweat and effort into fixing them up. For better or worse, most “retail” buyers are looking for move-in ready homes.
So with that being said, it’s true that a cash offer is going to be lower than if you fixed up the house yourself and then sold it to a traditional buyer.
For example, let’s say a home needs 60k worth of work. If you did all that work, and spent all those weeks and months dealing with the project, you’d be able to resell the fixed up house for 500k.
The cash buyer will have to spend the same amount of money fixing up the house. So, they aren’t going to be able to pay you 500k. They’ll need to deduct their repair costs from that price, which gets us 440k. Fair enough, right?
But, they also have to make a profit to make those repairs worth doing. Otherwise what is the point of doing those repairs?
Let’s assume they need to make a 10% profit in order for these repairs to make financial sense. So if they resell the house for 500k, that would be 50k in profit (which, sadly, turns out to be a lot less when you deduct taxes and closing costs). If they need to make 50k, then their offer can be no more than 390k (500k – 60k in repairs – 50k in needed profit).
So, a cash offer is just the value of house after repairs, minus the cost of those repairs, minus any profit the buyer needs for the deal to make sense.
So What Did We Learn?
He who does the work, reaps the reward. With a cash offer, the buyer will take on the risk, time, headache, and responsibility of cleaning, repairing the house, and he will be compensated for that with a profit. In a traditional home sale, you will take on the risk, time, headache, and responsibility of cleaning/repairing the house, and you will be compensated for that with an additional profit (on top of what you’re already making).
So to answer the original question: no, a cash offer is not always, or even most times, a lowball offer (unless the buyer is being shady or unethical, which is a different story altogether). A cash offer is based on some simple, common sense arithmetic that ensures the buyer is getting a fair deal as well as the seller.
Special Cases
Massachusetts, and the Boston area especially, is an interesting market. The city of Boston and, to some extent, its surrounding suburbs, are going through a golden age of building and development.
There’s a lot of properties that have the potential to be developed into “bigger” and “better” uses. If a single family home is located in a 3-family neighborhood, there’s a strong possibility of getting that lot approved for a 3-family. So a developer or builder might value that house based on its development potential, not its current status as a single family.
What does that mean for Massachusetts homeowners?
It means that if you own a property in a zone that’s ripe for building or development, you might actually get above market value for your home. I don’t want to overstate this, because it doesn’t happen with every house, but we’ve seen it a good handful of times in Boston.
Curious what the cash value is for your home? Call us at (617) 831 6186 or fill out the form below to find out!