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Advice from the Leading Home Buying Brand
If you're considering selling your house to a cash home buyer, one of the first questions you're likely to ask is:
“How do I know if the offer I'm getting is fair?”
It's a good question.
Cash offers can be difficult to evaluate because selling to a professional home buyer is different from listing a house with a real estate agent. You may receive less than you might get from a traditional retail buyer - but you may also avoid repairs, commissions, months of uncertainty, and many of the other costs and hassles associated with a traditional home sale.
So how do you determine whether a cash offer is reasonable?
It starts with understanding how professional home buyers determine what they can pay.
One of the biggest sources of confusion is the difference between a home's market value and the amount a professional investor can pay for it.
Suppose renovated homes similar to yours are selling for $350,000.
That doesn't necessarily mean your house is worth $350,000 today.
If your home needs a new roof, HVAC system, flooring, paint, kitchen updates and other repairs, a buyer has to consider the cost of completing that work. An investor also has expenses associated with purchasing, holding, renovating and eventually reselling the property.
That's why comparing a cash offer directly with the price of a completely renovated house down the street can be misleading.
The better question is:
What would my house realistically sell for today in its current condition?
Every company uses its own methodology, but professional investors generally consider several factors.
A buyer should begin by looking at actual real estate market data.
That typically means examining recent sales of similar homes in the surrounding area - often called "comps."
The most useful comparable properties usually have characteristics similar to yours, including:
The objective isn't simply to find the highest-priced house in the neighborhood. It's to develop a realistic estimate of what your property could be worth based on what buyers have actually paid for comparable homes.
Next comes condition.
This can make a significant difference in the value of a property.
A house that hasn't been updated in 25 years shouldn't necessarily be compared dollar-for-dollar with a neighboring home that has a new kitchen, renovated bathrooms, new flooring and a new roof.
Professional buyers may estimate the cost of items such as roofing, HVAC systems, plumbing, electrical work, flooring, paint, appliances, kitchens, bathrooms and structural repairs.
The more work the property requires, the more those costs affect what a buyer can reasonably pay.
Renovating a house isn't just about buying materials and hiring contractors.
Projects can take months. Unexpected problems can appear after work begins. Material and labor costs can change. Permits may be required. And the property continues generating expenses while the renovation is underway.
An investor assumes those risks when purchasing the property.
That's one reason an investor's offer will generally be lower than the potential future selling price of the property after it has been completely repaired and updated.
Professional buyers also incur costs that homeowners don't always see.
Depending on the transaction, those can include closing expenses, insurance, property taxes, utilities, financing costs, maintenance and eventual resale expenses.
Those costs are part of the economics of purchasing the property and have to be considered when determining an offer.
Finally, a professional real estate investor is operating a business.
After purchasing the property, making repairs, carrying it for several months and eventually selling it, there has to be enough potential return to justify the investment and the risk.
That doesn't mean every low offer is reasonable. It simply means that a fair cash offer and the maximum possible retail selling price are two different things.
This is one of the most important things to understand when comparing offers.
Imagine you could sell your home for $300,000 after making repairs and preparing it for a traditional sale.
Now compare that with a cash offer that is lower.
The difference between those two numbers isn't necessarily what you're "giving up."
With a traditional sale, you may have expenses for repairs, improvements, cleaning, landscaping, staging, real estate commissions or other transaction costs. You may also have mortgage payments, taxes, insurance and utilities while waiting for the property to sell.
A better comparison is:
How much money will I actually receive - and what will I have to spend, do and risk to get it?
For some homeowners, doing the work and pursuing the highest possible retail price makes perfect sense.
For others, accepting a lower price in exchange for selling the property as-is may be worth it.
Neither choice is automatically better. It depends on the property and the homeowner's situation.
A reputable cash buyer should be willing to have a straightforward conversation about how the offer was determined.
You don't necessarily need to see every line of the buyer's financial model, but you should be able to understand the basic assumptions behind the number.
Ask questions such as:
What comparable properties did you use?
What do you think the house will be worth after repairs?
What repairs or updates are you expecting to make?
Are there any fees or commissions that will be deducted from the offer?
Can the offer change after I sign the agreement? If so, under what circumstances?
Pay particular attention to that last question.
An impressive initial offer isn't very useful if the buyer routinely reduces the price shortly before closing.
You should also know who you're dealing with.
Some companies purchase homes directly. Others may be wholesalers whose business model involves putting a property under contract and then finding another investor to purchase that contract.
That distinction isn't necessarily obvious to homeowners.
Ask:
Are you actually purchasing my property, or do you intend to assign the contract to another buyer?
Also ask whether the buyer has inspected the property before making a firm offer.
The fewer unknowns remaining after you accept an offer, the more confidence you can have in the transaction.
You aren't obligated to accept the first cash offer you receive.
If you're uncertain about the value of your property, getting two or three opinions can give you useful perspective.
You can also talk with a local real estate agent about what the house might sell for on the open market in its current condition - and what it might sell for after repairs.
Just make sure you're comparing the alternatives fairly.
A $325,000 projected retail selling price after $40,000 in renovations isn't directly comparable to a $250,000 cash offer that requires no repairs and can close quickly.
Put the costs, time and risks of each option on the table.
Then decide which approach makes the most sense for you.
Price matters. Of course it does.
But an offer is also a promise to perform.
A slightly higher offer from a buyer who can't close, intends to renegotiate the price later or needs to find another investor isn't necessarily more valuable than a firm offer from a buyer who has inspected the property and is prepared to complete the purchase.
When evaluating a cash offer, consider price, certainty, convenience and timing together.
That's the real comparison.
At WeBuyHouses.com, our local property buyers purchase homes that often need extensive repairs or updating.
We don't simply pick a number out of the air.
We use local real estate market data, comparable property sales and estimates of the repairs and updates the property requires to determine the best possible price we can pay while taking responsibility for the work and costs necessary to improve the property.
We know that selling to a cash buyer isn't the right solution for every homeowner.
If your house is in excellent condition, you have plenty of time to sell, and your primary goal is maximizing the potential selling price, listing the property traditionally may be the better approach.
But if your property needs significant repairs or updates - and you'd rather sell it as-is without spending the time and money to renovate it yourself - a professional cash buyer can provide another option.
Ultimately, a fair cash offer isn't simply the biggest number someone puts in front of you.
It's an offer you understand, from a buyer you trust, for a price that makes sense given the condition of your property and the convenience and certainty you're receiving in return.
Enter the address of your home and we'll make you a cash offer!