How a Sacramento cash offer is built

Every cash offer I ever watched close was built the same way, whether the house was in Land Park or in Rio Linda. The buyer starts from what the house will sell for once it's fixed, and then subtracts. Four subtractions, always the same four. If you know the four, you can read any offer that lands in your mailbox. This is the arithmetic piece; the overview of selling a Sacramento house for cash ties it to the other two.

The numbers below are a made-up example to show the shape of it, 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 using a mortgage. The buyer builds that number from closed sales of similar houses nearby, usually within the last six months and a mile or so out. Closed sales, not asking prices. A buyer quoting you other people's list prices is either new or hoping you are.

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

The four subtractions

Picture a three-bedroom on a flat street in North Highlands, built in the fifties, one owner most of that time. Cleaned up and modernized it might sell for $460,000; call that the ARV. As it stands, the roof is at the end of its life, the HVAC is original, the kitchen and both baths are untouched, and there's dry rot along one eave.

Repairs come off first. Roof, call it $18,000. HVAC replacement, $14,000. Kitchen, baths, flooring and paint, $55,000. Dry rot and the odds-and-ends a contractor finds once he's up there, $13,000. So roughly $100,000 in repairs.

Then the buyer's resale costs. They have to sell this house again, and that costs them what it would cost you: commission on the re-sale, say five percent of $460,000, about $23,000; four to six months of holding costs — taxes, insurance, utilities, loan — call it $18,000; and their own closing and transfer costs on the way out, roughly $6,000. Total near $47,000.

Then the margin. An investor doing this for a living wants something like ten percent of ARV or they'd rather buy a different house. Say $46,000.

$460,000 minus $100,000 minus $47,000 minus $46,000 comes to $267,000. The written offer lands around $265,000.

Why "percent of value" is a useless number by itself

That offer is about 58 percent of the $460,000 fixed-up figure, and people fixate on that percentage. I wish they wouldn't.

Repairs and profit are dollar amounts, and dollars don't shrink with the house. Put the exact same roof, HVAC and kitchen on a $750,000 house in East Sacramento and that $100,000 repair line is a far smaller slice; the offer as a percentage of value climbs into the seventies on the same honest math. Drop it onto a $300,000 house in Del Paso Heights and the percentage sinks, same buyer, same arithmetic. The percentage tells you about the repair bill relative to the price, not about whether you're being treated fairly.

It moves with the buyer's plan, too. Someone keeping the house as a rental has no flip commission and a longer horizon, so their number can come in higher. A buyer nervous about the market pads the margin. Two fair offers on one house can sit $40,000 apart with neither one lying, which is exactly why I tell people to get more than one in writing and then read the subtractions rather than the bottom line. If a buyer will show you where their offer comes from, you can check the repair line against a contractor of your own; if they won't break it down at all, that tells you something too.

The other side of the ledger, the one sellers forget

If you list on the open market instead, that $460,000 isn't what you keep either.

Agent commission, say five percent, $23,000. Cleanup, a few repairs to pass a buyer's inspection, and staging on a house nobody's touched in decades, call it $18,000. Two or three months carrying it while it sells, $9,000 in taxes, insurance and utilities. Then the inspection: an ordinary buyer's inspector finds the roof and the HVAC, and that buyer either walks or asks for a credit. Budget $25,000 in credits or a price cut.

$460,000 minus $23,000 minus $18,000 minus $9,000 minus $25,000 is about $385,000. Against $265,000 from the cash buyer.

So the honest gap on this house is roughly $120,000, not the $195,000 the raw percentage suggested. That $120,000 is what you pay for closing in a couple of weeks instead of three or four months, no strangers walking through on Saturdays, no repairs out of your pocket, and no lender backing out over the roof in week seven. Whether that trade is worth it depends on your situation, and I've seen it go both ways. A client of mine in Carmichael, years ago, took a cash offer I privately thought was light; eight months later the buyer's crew found the sewer lateral had collapsed under the slab, a repair that would have eaten the difference and then some on the open market, with the sale falling apart around it. I stopped assuming I knew which side of that gap was the smart side.

Two tax lines escrow adds that sellers forget

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 real-estate withholding page before you sign, 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 and lived in it for enough of the last five years. The tests and the dollar limits are in IRS Publication 523, Selling Your Home. I watched these close for twenty years and I still wouldn't call any of this tax advice; talk to whoever does your taxes before you pick a closing date, because the date decides which tax year the sale falls in.

What I'd actually do