We like to think of the value of our house as whatever it would appraise for, comp for, or sell for on the open market. That’s never an exact number, but definitely a number that falls into a very small circle of values. We’ll call that value the “Appraised Value.”
That value, however, has a few assumptions built in. It assumes that the seller has a house that can be marketed to the world (put on the MLS) for an extended period of time and that buyers can finance the home in any way typically available to them (Cash, Conventional, FHA, VA, etc.).
In other words, the Appraised Value assumes the homeowner has the luxury of time and the house is both marketable and “loanable”.
But that’s not always the case. When sellers find themselves in distress, or the property becomes in such disrepair that loans are not available to it, it drastically effects the value. In that case, the home has a completely different value.
When a homeowner gets in “distress” (i.e. pending foreclosure, divorce, or any other situation that puts a homeowner into a “have to sell quickly” situation), the home goes from being an asset to being a vehicle to solve the pending problems in their lives. They no longer have the luxury of marketing the home for an extended period of time to everyone. And time is required for a loan, so now they have to have a cash buyer (or someone with quick access to cash).
Therefore, the home now has a value known as the “Cash Value”.
Most people do not buy their primary residence with cash. And they typically do not want to close within a manner of days. Therefore, an investor is often required to quickly pay cash. An investor purchases property for one reason… to make money.
Therefore, the cash value has a standard way that is obtained that all but guarantees the investor will make money. This formula has been around for decades and every investor knows it. We start with the “Appraised Value” of the home AFTER any and all repairs and updating have been completed. That’s known as the “ARV” or After-Repaired Value (I hate that term, but that’s another blog topic).
The formula then is ARV *(times) 70% -(minus) the cost of the updating and repairs.
So if a home would sell on the open market (with the luxury of time) after it has been repaired and updated for $200,000.00 and the cost of the updating and repairs is $40,000.00, the Cash Value of a home would be $100,000.00.
$200,000.00 * 70% = $140,000.00 – $40,000.00 = $100,000.00.
By understanding, and helping the homeowner understand this is not a low-ball offer, but simply the cash value of the home can help both parties reach a reasonable and agreeable solution to use the home as a vehicle to solve the homeowner’s pressing life problems.