One of the most stressful things to manage as a consumer of any service is trying to decipher one estimate from another. Is there a quality difference in the labor? Is one company using better materials to complete the job? Well, this is no different than getting an offer on your home from a New Jersey cash home buyer. Regardless of who or what company is making the offer, I would like transparency as to why offers are different from one another as I’m sure you would to. In this article, we dive into the rationale behind the numbers – and how we as a professional home buying company we develop our offers when buying houses in New Jersey.
1.) ARV (After Repair Value)
What exactly is the ARV and why is it important? The ARV is just a fancy acronym for “after repair value”, or in simple terms, what a home will sell for once the renovations are completed. This is always our starting point because it the most crucial number in our offer formula. Getting this number right will not only affect our profit margin once we go to resell the property, but it will allow us to provide a fair offer to the homeowner. In order to determine the ARV, we have to find homes that have recently sold that are most similar to the subject property. For example, if we are making an offer on a split-level house that has 3 bedrooms, 2 bathrooms, and a 1 car garage that was built in the ’50s, we want to pull comparable sales that best meet this criterion. It is also important to pull comparables that have been renovated or in very good condition because we want to know what the subject property will sell for once the renovations are completed. Let’s continue to use the split-level home as an example. After looking at the comparables, we have determined that a conservative ARV for the subject property is $300,000. Let’s move on to the next step.
Professional home buying companies in New Jersey may differ slightly on exactly what multiplier they use, but we all use one. The rationale for the multiplier is that it helps us make offers quickly and efficiently because it builds in all the “soft costs”, profit margin, and renovation overage continency in one simple, easy-to-use, percentage number. At Halo Homebuyers, we use a multiplier of 25 – 28%. In this current market, we are using 25% because the market is still a strong seller’s market. This means that about 10 – 13% is allocated as a potential profit margin, 7 – 10% is allocated toward soft costs which include all closing costs on the purchase, all carrying costs for the length of the project, and all closing costs on the resale of the project. The remaining 2 – 5% is a renovation overage contingency in case we go over budget on the renovation. The majority of the time this is the case because we want to make sure we are doing a quality job. Reverting back to our example of the split-level home we are making an offer on, we will use a multiplier of 25%.
3.) Estimated Repairs
The next phase is determining our renovation budget. In order to determine this number, we will have to meet the home seller at the property to do a walk-through inspection. This is a standard and very efficient process where we quickly go through the home and take photos so we can create a high-level renovation budget. The renovated comparable sales that we pulled in step 1 will help us figure out what type of renovation we will have to do in order to achieve the determined ARV. It is important to note that during the inspection, we are looking for amenities that have already been modernized and updated. If a kitchen is clean but very cosmetically outdated, then we may have to figure on replacing it in order to get the desired ARV. There is an art to this process but generally, the goal is to update and modernize the home because this will give us the best return on our invested dollars. A standard full renovation can cost about $65,000 based on the average single-family 3 bedroom/2 bathroom home. We will use this number for our split-level home example.
4.) The Formula
Finally, we have all the components to make our official offer to buy the home. We have arrived at an ARV of $300,000 based on our comparable sales analysis. We believe that there is strong market evidence based on our objective findings to validate this resale number. Our standard multiplier is 25% because the market is strong, the location of the subject property is marketable, and the house has good potential. Lastly, we have determined that after the walk-through inspection that the renovation requirements amount to $65,000, which will be the cost to bring the home to the $300,000 ARV price point. Here is the formula:
OFFER = ARV – Multiplier – Estimated Repairs
If we plug in the example numbers into our formula ($300,000 – 25% – $65,000) we arrive at an offer of $160,000.
And that’s all there is to it!
At Halo Homebuyers, we are happy to answer any questions or concerns about your situation that you may have. We can even provide you an over-the-phone preliminary estimate of your property before you make an appointment with us! If you are comfortable with our estimate, we can then provide you a firm offer after doing our walk-through inspection. I hope this information has been helpful and that you now understand just how we develop our offers at Halo Homebuyers when buying houses in New Jersey! Send us a message or call Halo Homebuyers at (908) 547-0404 today to learn more about how we can help you sell your home!