Previous home owner wants to buy back the house

I assume you hadn't put the house on the market, since you don't have an asking price. Do you even want to move? There is no reason you have to entertain offers.

If you are interested in selling, the benchmark would be current market value. This does not necessarily relate to the previous price and what you've spent on improvements; it's a matter of what similar houses are going for in your area now. The price of the house from 3.5 years ago would be one data point for valuation but it should be calibrated to the current local market.

It is possible that you have a highly motivated buyer, since apparently the previous owner has a reason for wanting this house in particular, especially if they approached you without it even being on the market. Thus, you may be able to get above market value. If you act uninterested in selling and just let them make an offer first, you may find out just how badly they want the house.

Depending on the area, 3.5 years can change a lot. In either direction.

Fortunately, getting a more or less reliable estimate isn't that difficult.

• Many real estate brokers will give you an estimate for free, hoping to convince you to sell through them (but you are not obligated to).
• Banks offer this service in case you want to refinance your mortgage.
• If you want the opinion of someone who has no possible conflict of interest, then you can get a professional real estate assessor to get you an estimate (but they will of course want money for their services)
• You can look up real estate websites and check what other people want for similar objects in your area

But in the end, the real value of the house depends on what it's worth to you. When you like your house and have no reason to move out, then you are under no obligation to offer it for sale at the current market price, or even offer it for sale at all.

If the previous owner of my apartment would show up and tell me they want it back, then I would not just ask for the current market price. I would also ask them to reimburse me for any secondary costs I had for the purchase and also for my time and labor it took to find it, close the deal and move in. And then some extra because I like my apartment and I see absolutely no reason why I would want to live anywhere else. So they would need to give me a reason in form of another large heap of money.

So yes, my price would be rather outrageous compared to the rest of the market, and I would question their sanity if they would pay it while there is a similar apartment for sale at a more reasonable price just 200m down the street. But that's the cost of wanting to buy something that's not for sale.

what should we ask price wise?

The market value, of course. As @Phillip suggested, have a professional real estate appraiser (that's what they're called in the US).

And make the buyer pay all the closing costs.

I do not want to offend by asking too much

Stop thinking that way. Immediately!!! There is no offense in purely business negotiations (as opposed to setting prices for socially inappropriate reasons: an "-ism").

If you want to respond to their offer:

• Set the price at what you need to pay off the loan or the fair market value (which ever is higher); all closing expenses for the old house and the new house; the cost of moving; pain and suffering; and don't forget some profit.

• make the deal contingent on you being able to move into your new place.

• They need to pay an upfront non-refundable amount to cover your expenses if the deal falls though.

• The house is being sold as-is. They can't inspect it, or ask you to make any repairs.

• They need to show they are approved for a mortgage.

People normally absorb these costs when they want to move, or if they have to move. To get you to want to move it, they have to make it worth your while.

Or just politely say no thanks.