Understanding how investors determine their offer price removes much of the mystery from the process.
As a home owner you see an advertisment from an investor interested in purchasing your home. Curious, you reach out to get an offer on your house.
Except it’s not what you were expecting to hear. It’s lower than other homes have sold for recently. Much lower, even. And there’s no reasoning involved to help you understand where that number comes from.
That disconnect, what the offer is and what you think it should be, is one of the most frustrating conversations we hear in investor purchases. But if you know how investors determine their offer prices, it’s easier to understand the process. Let’s dig into how investors crunch their numbers.
Investors Don’t Care About What Your House Is Worth Today
When traditional homebuyers make you an offer, they’re pricing your home as-is.
Investors don’t do that. They think about what the home will be worth once repairs are made and then they price backward from that point.
That post-repair value, once the house has been returned to good-as-new condition, is their starting point. Let’s call that after-repair value, or ARV.
ARV is how much they believe the home can sell for once everything is fixed up. They calculate this by researching nearby, recently sold homes that match the home in size, age, neighborhood, and finish level.
If three upgraded homes recently sold nearby for about $280,000, that’s likely very close to where this property will sell for once fixed up. That $280,000 value is the investor’s starting point.
What Happens Next? Costs Get Deducted
Say the home’s after-repair value is $280,000. The investor then subtracts all of the costs they’ll need to get the home to that point.
Again, these costs are many. Some are obvious. Repairs will cost x amount. But others are hidden. There are carrying costs (taxes, insurance, utilities) to pay while repairs occur. There are closing costs on both ends of the sale. There are financing costs: either interest on a loan or simply cost of capital.
All of those expenses subtract from the home’s ARV.
What’s leftover is potential profit, also known as the investor’s margin. And that margin needs to be wide enough to cover unknowns. All renovation deals encounter surprises. Appliances that need replacing, for instance, that weren’t found during the initial walkthrough. Projects take longer than expected. Markets can shift. Anything can happen.
So when investors price a deal, they factor in that uncertainty from day one.
How Come The Offer is so Low?
This is the part where emotions can run high on the seller’s side. But before you send that investor a cease-and-desist for lowballing, remember this:
The reason an investor offer is so much lower than your neighbor’s house sold for is because the investor is absorbing everything you aren’t.
The risk. The repairs. The uncertainty. The time. The carrying costs.
You, selling your home the traditional way, are selling a ready-to-move-in package to the next buyer. The buyer who just needs to walk in and start living. An investor, on the other hand, is buying a rehab project. A house that needs work. All of the financial risk that comes with buying something “as-is.”
Investors price that risk into their offer.
For example: Say the house’s after-repair value is $280,000. But the repairs will cost $60,000, and it will take four months to complete everything. The investor needs to factor in repairs, carrying costs for those four months, closing costs on purchase and sale (or financing), and profit margin.
Suddenly that offer looks more like $140,000-$160,000, even though once repairs are complete it will be worth nearly twice that.
That math isn’t arbitrary. It’s the only way the project works.
Your Neighbor’s House can Fetch a Different Offer
Another thing to understand is why seemingly similar homes might receive vastly different offers from investors.
For example, the home next door. They may have sold for roughly the same amount, but the condition of that house matters. Does it need a new roof? Updated electrical? Basic cosmetics? Or is it structurally sound and just needs cosmetic updates?
Essentially, both houses might reach the same final value. But they don’t get there via the same path.
Similarly, house pricing can vary block by block, even in the same neighborhood. Location matters. So does lot size, floor plan, and even which direction values are moving in the immediate area.
Finally, every investor has a different strategy. Someone who plans on renting may calculate costs differently than someone who wants to renovate and resell quickly. Business models differ. And different business models price houses differently, even if they’re right next door to one another.
Why You Should Care About How Investors Price Houses
So should you take every investor offer lying down?
Of course not. Some offers are better than others. But some offers make a lot more sense than you might think.
An offer is only “low” if it doesn’t work for your timeline, your house, or your situation. The question isn’t whether it matches what your neighbor got for their house. It’s whether the offer works for you.
Sometimes listing traditionally will result in a higher offer. But it also comes with showings, inspections, repairs, and other hoops you’ll need to jump through. Not to mention time.
Investors can’t offer you the highest possible price. But they can offer you certainty.
There’s no right or wrong path for every seller. But understanding how investor offers are generated can help you make the choice that’s right for you.
Offers Reflect the Work that Needs to be Done
The problem is, investor-buying-your-home-for-cash isn’t always portrayed accurately.
Take this example: Investors swoop in and buy your house for way less than it’s worth. Then they renovate it and flip it for profit.
The truth is more nuanced than that.
Remember how investors base their offer prices on what the property can sell for after repairs? Whenever they price a deal, they’re guessing. Repair costs could increase when they renovate. The market could shift. Something that seemed like a rehab no-brainer can turn into a lot more.
That’s why the offer they give you isn’t just about what your house is worth now. It’s about how much work it will need to become livable again. And how much that unknown work costs.
Now that you know how investors price homes, offers should look a lot less mysterious.