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Author: Joshua Berg ©
I am considering selling my house provided I could get something close to market value. Does anyone guarantee market value or a percentage of market value?
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Typically you wouldn't expect to receive top dollar retail value selling your house to an investor, but there are situations where you may get quite close to market price.
If it is an ideal rental size, in an ideal rental location and the right type of property, then there are scenarios you could get very close to market value from a real estate investor for your house.
Like any other business, real estate investors must go into a deal knowing they'll potentially make a certain minimum profit.
So for a deal to work there must typically be some attracting factor, such as good amount of equity in the home, or a good owner finance interest rate, a take over payments deal with a possible second lien to the seller and all kinds of other possibilities.
If an investor can buy the house from you without having to come up with all the cash at once, then there is a better chance of you getting a much better price for your house.
So you're probably wondering now, "Well how does an investor come up with their offering price & what criteria might they use to make it?"
Although every offer will be different and one investor can afford to offer more and another less, there are some fairly common criteria that are used by many investors, especially if making cash offers. The formula is also most commonly used on houses that do need repairs, not necessarily houses already in retail condition.
- A term popularly used by investors is abbreviated to MAO (Maximum Allowable Offer) to describe what an investor should offer when buying a house. It is calculated as follows:
- ARV X 65% - Repairs = MAO
- Where ARV is the After Repair Value of the property.
That means repaired to "tip-top" shape, the condition the house would need to be in to sell on retail for the best possible price. You can figure this out by calculating how many repairs your house needs to look as nice as the nicest houses (similar size, similar age, rooms & bathrooms) on the street, or subdivision which have recently sold.
To calculate the ARV an investor will use market comparables for houses recently sold in their After Repaired condition. Not necessarily the most expensive, but the average price range of houses sold.
Repairs are any work needed to be done to the property to get it into excellent retail condition. Paint, carpet, cleaning and hardware replacement are minimums. See Fix and Rehab for a more complete list.
MAO does not guarantee the investor will make a profit, it has previously been described as the following:
"The price at which an investor can reasonably expect to earn a decent profit and have only a minimal chance of losing money. Anything greater than MAO, will significantly increase the investor's chances of losing money, and make the payoff too low commensurate with the risk associated with an investment."
In conclusion the typical investor formula for offer price may be the After Repair Value of the house - 35% - any repairs needed to get the property into tip-top shape.
If that already sounds like to low an offer, don't panic. Consider we're talking about what would usually be a cash offer. If you're not prepared to sell your house that cheap, or if you don't have that much equity in the house, there is still a good chance an investor will be able to work with you in buying your house. There are other options besides all cash offers and investors will usually give you a number of choices.