How Exactly Do You Calculate Offers?
We find out what the house could sell for all fixed up, and then we just subtract our repair costs, other expenses, and required profit to come up with our cash offer.
Let’s take a case study from a recent house we bought: 318 Bishop St in Framingham. The house needed some work.
First, we have to know what a house like this can sell for all fixed up.
We found a few recent sales of comparable properties; houses with the same number of bedrooms, similar square footage, similar location, and similar age. These houses were in renovated condition, so we knew our house would get a similar price all fixed up.
Comparable Houses (Renovated)
29 Winter St (Sold, $500,000)
42 Winter St (Sold, $529,000)
Now Here’s Our House:
Based on experience, we know this is a lighter, more cosmetic renovation. These typically cost around $40/square foot, and with 1800 square feet, the total repair budget comes out to around $70-80,000.
To keep our business functional, we aim for around a 10% profit margin. If the house resells for $500,000, that would be around a $50,000 profit margin.
We will also be paying 3% to a realtor when we resell the home, so that’s another $15,000 or so. Finally, we have several thousand dollars in closing costs and various fees (roughly $8,000).
So our cash offer for the house in its current, as-is condition would just be: the estimated resale value after repairs – repair costs – the various fees – our required profit.
That’s roughly: $525,000 resale after repairs – $70,000 in repairs – $15,000 in realtor fees – $8,000 in closing costs – $50,000 in profit = $382,000 cash offer for the home in its present condition.
That is almost exactly what we paid for this home ($385,000).