How an offer is calculated.

THE SHORT VERSION

An offer has to cover five things.

A house bought this way is bought to be repaired and resold. Whatever is offered has to pay for the repair, the time, and the risk, or there is no purchase to make. That is not a negotiating position, it is the whole of it.

• What the house is worth once the work is done. Local sales of comparable houses, not a national average and not a computer guess.
• What the work costs. Repairs, permits, and cleanout, priced as though a contractor were doing all of it. This is usually the largest single deduction.
• What it costs to hold. Taxes, insurance, utilities, loan cost, and association dues for the months the work takes. An empty house still costs money every month it sits.
• What it costs to buy and sell. Escrow, title, transfer tax, and the cost of the sale that comes afterward, because the house is going to be sold again.
• A margin. The buyer carries the risk that the work costs more, takes longer, or sells for less. The margin is what pays for that risk, and it is the part most sites leave out of the conversation entirely.

A NUMBER, WORKED THROUGH

One house, one set of numbers.

This example is invented to show how the arithmetic works. It is not a formula, it is not a prediction for your house, and no percentage taken from it applies to anything else.

• Value once the work is finished, from local sales of comparable houses: $465,000
• The work it needs, from contractor bids, permits, and cleanout: −$68,000
• Holding it while that work happens, roughly six months of taxes, insurance, utilities, and loan cost: −$14,000
• Buying it and selling it again, including escrow, title, transfer tax, and the cost of the later sale: −$33,000
• The margin for taking the risk that the work costs more or sells for less: −$38,000
• A direct offer built on those five numbers: $312,000

The same house listed instead. Put that house on the open market after the work was finished and the sale price is the $465,000 figure, but the work, the holding costs, and the selling costs all come out of the seller’s side rather than the buyer’s. Which route leaves more is mostly a question of who carries those costs and what the certainty is worth to you. Compare the two side by side.

WHAT THE ARITHMETIC CANNOT SEE

Numbers move after the walkthrough.

Every figure above is an estimate made before anyone has been inside the house. A few things only turn up in person, or later:

• Work that is worse than it looked from outside, or hidden behind a wall.
• Unpermitted additions, electrical, or plumbing that has to be corrected before any sale can close.
• A title problem, an old lien, or an ownership question that has to be cleared first.
• Tenants in place, or belongings that have to be removed before the work starts.
• Roof, foundation, or structural work that changes the budget for everything else.

If a number changes after the walkthrough, the useful question is what changed and on which line. Ask for the revised figure and the reason in writing. A buyer who cannot explain a change in specific terms is either guessing or negotiating without saying so.

WHAT THIS PAGE IS NOT

Not an appraisal, and not advice.

None of this is an appraisal or a valuation. An appraiser values property for lending and estate purposes, under different rules, and produces something this page cannot.

Kevin is a California real estate licensee and a property buyer. He does not give legal, tax, probate, or financial advice, and nothing here replaces it. Where a situation involves probate, heirs, tax consequences, or a contract you are being asked to sign, talk to a professional in that field before deciding anything.

For what a direct sale does and does not include, read what a direct sale actually is. For the questions worth putting to any buyer before you sign, start with these.