How a Bay Area cash offer is actually calculated

Every cash offer I ever opened was built the same way. They start from what the house will sell for once it's fixed, and then they subtract. Four subtractions, and it's always the same four.

The numbers below are a worked example, not anybody's real deal.

Start at the top: after-repair value

After-repair value, ARV in the trade, is what the house would sell for in good condition, on the open market, to an ordinary buyer with a mortgage. The buyer pulls it from closed sales of similar houses nearby, usually inside the last six months and within a mile or so. Closed sales; a buyer working from asking prices is either new or hoping you are.

You can sanity-check their number. California Association of Realtors market data gives county and city medians and how fast they're moving, which tells you whether the comps the buyer picked came out of a rising few months or a falling few. The National Association of Realtors research is broader, but useful on days on market and the cash share of sales. Neither one gives you your house's number, but they'll tell you when a buyer's comps smell wrong.

The four subtractions

Say there's a house on a flat street in Redwood City, west of El Camino, three bedrooms. Put a sign in the yard tomorrow and it lists at $1,400,000. The roof is at the end of its life, and there's a crack in the stem wall that a contractor says needs piers. A buyer who fixes all of it properly and re-lists might get $1,550,000 for the finished product. That $1,550,000 is the ARV.

Repairs come off first. Roof, call it $45,000. Foundation, with engineering and permits, $90,000, and I've seen that number double once somebody opened the crawl space. Paint, floors, a kitchen that's thirty years old, $60,000. So $195,000 in repairs.

Then the buyer's resale costs. They have to sell this house again, and that costs them the same things it would cost you. Commission on the flip, say five percent of $1,550,000, is $77,500. Six months of holding costs, say $50,000. Transfer tax and their own closing costs on the way out, another $10,000 or so. Total $137,500.

Then the margin. A flipper doing this for a living wants something like ten percent of ARV, or he'd rather buy a different house. $155,000.

$1,550,000 minus $195,000 minus $137,500 minus $155,000 comes to $1,062,500. Call the offer $1,060,000.

Why "percent of value" is a useless number on its own

That offer works out to about 76 percent of the $1,400,000 list figure. People fixate on that percentage, and I wish they wouldn't.

Repairs and profit are dollar amounts, and dollars don't scale with the house. Put the same roof and the same foundation problem on a $700,000 house in Gilroy and the $195,000 repair line is now 28 percent of value instead of 14. The offer as a share of value drops into the sixties, and it's the same buyer doing the same honest math.

It moves the other way too. A buyer who means to keep the house as a rental has no flip commission and a longer horizon, so their number can come in higher. A buyer who's nervous about the market pads the margin. Two fair offers on the same house can sit $100,000 apart with neither one lying. Which is why I tell people to get more than one, and when a buyer will give you a cash offer with the math shown, to read the subtractions and not just the bottom line.

The side of the ledger sellers forget

If you list instead, that $1,400,000 isn't what you keep either.

Commission, say five percent, $70,000. Staging and pre-listing cleanup on a house nobody has touched in decades, $15,000. Three months of carrying it while it sells, mortgage or no mortgage, $12,000 in tax, insurance, utilities and the gardener. Then the inspection. An ordinary buyer's inspector is going to find the roof and the foundation, and that buyer either walks or asks for a credit. On this house I'd budget $60,000 in credits or price reduction.

$1,400,000 minus $70,000 minus $15,000 minus $12,000 minus $60,000 is $1,243,000. Against $1,060,000 from the cash buyer.

So the honest gap on this house is around $183,000, not the $340,000 the percentage was suggesting. That $183,000 buys a closing in two weeks instead of three months, no strangers walking through on Sunday afternoons, and no chance of a lender balking at the foundation in week seven.

Whether that's worth it is your call. I'll tell you about one where I thought the sellers were wrong. A couple in San Carlos, this was 2011, took a cash offer on a house with a roof about like the one above, and I remember thinking at the signing that they'd left a good hundred thousand on the table. The husband kept apologizing to the notary for his handwriting. About a year later the buyer's contractor was in our office on something else and mentioned that when they pulled the roof, the rafters on the north side had been sistered twice and were rotten under the second layer. Nobody's inspector had caught it. I don't know what the couple did with the money; they moved to Reno, I think, or Sparks. I've stopped assuming I know which side of that gap is the smart side.

Two tax things to know either way

Escrow may withhold part of your sale price and send it to Sacramento. California requires withholding on many real estate sales unless the seller certifies an exemption on the state form at closing, and selling your principal residence is one of the common exemptions. Read the FTB's page on real estate withholding before you sign anything, because the escrow officer will ask, and "I don't know" means they withhold.

Federal gain on your main home can be partly or fully excluded if you owned it and lived in it for enough of the last five years. The amounts and the tests are in IRS Publication 523, Selling Your Home. I closed these for a living and I still wouldn't call any of this tax advice; talk to whoever does your taxes before you pick a closing date, since the date decides which tax year the sale lands in.

What I would do