Where Do The Lines Cross? Discounting Price Isn’t The Universal Fix-All

by | BiggerPockets.com

This weekend while having lunch with three very experienced, very solid investment property lenders, the conversation swerved into a discussion of using price as an equalizer. An example would be a simple physical problem, say an old roof needing a complete replacement. If everything else was up to your standard as the buyer/investor you’d probably agree to a price drop equaling the cost of the proposed reroof. Simple, right?

OK, much of the time, I’ll row that boat with ya. We’ve all done it, almost routinely.

But what about ‘impurities’ that can’t be solved with a phone call?

  • Location — At what point do ya punt?
  • Functional Obsolescence — Redesign, rebuild, or walk?
  • Area a bit dicey? Are Smith ‘n Wesson your partners?
  • Severely cracked slab — Will repair be permanent? Really?

Let’s focus on location — How bad must it be for you to walk?

Would you, for instance, buy a 2,000 square foot 3 bedroom 2.5 bath home in the middle of a dangerous neighborhood dominated by local gangs?

But, you argue, the area is demonstrably trending upward. Fair enough. I understand the school saying that a low enough price levels all fields. I vehemently disagree with that thinking, but I understand it. It’s much same way Wall Streeters discount for risk in stocks and bonds. Or the way investors buy existing high risk notes secured by real estate at pennies on the dollar. They wouldn’t dream of paying 50¢ on the dollar, but for 23¢? “Gimme a hundred of those notes to go, please.”

On paper this makes sense to the real estate investor. Things seem to change however when the Firestones hit the pavement. I suggest that, contrary to what appears to be popular belief, sometimes your best move is — away.

All over the country we’re seeing real estate investors with and without solid experience/training, operating from the ‘axiom’ that price solves all things when acquiring real estate. Step away from the textbook a minute or two, and compare that belief to the stats we’re bombarded with daily. A huge and discouraging minority of investors are acting as if discounted price, if low enough, is akin to spiritual absolution.

My experience, not to mention what’s happening in real life/real time right in front of us, is screamin’ that yes, it’s a concept of some real value, but axiomatic? Gimme a break.

We’ve gotta stop worshiping at the altar of price.

It’s a false god who’ll cast you off like a dirty shirt.

I’m not sayin’ everything we buy must adhere to the gold standard for location, construction, demographics, and the rest. I am sayin’ that as is true in most of life, much of what’s considered universally axiomatic is anything but. Ask the thousands of investors who’ve recently discovered low prices didn’t give them the power to walk on water.

I learned this lesson the hard way back in the day. I don’t recommend the experience. Ironically, as a direct result of that lunchtime conversation, I’ll be seeing if price can remedy what I view as impurities in location.

I’ll keep you in the loop.

Image: jscreationzs / FreeDigitalPhotos.net

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. It’ll be interesting to see what you decide in the end. I have to say, I’m of the opinion that there are certain things for which no price can compensate. Anyone who’s actually in a position (both financially and psychologically) to buy a house just isn’t going to settle for slightly cheaper house in a terrifying neighborhood – particularly now.

  2. Jeff Brown

    MH — Common sense, if nothing else, says you’re right, of course. Don’t say that to the bargain hunters with cash out there, but no discernment. There may be a new class of investor developing. The investors down the road who aren’t upside down cuz they bought for cash, but if they sell the losses will be painful. Some insist on learning the hard way.

  3. You’re right; people need to look at the big picture, and not overvalue price reductions at the expense of location. Having said that, buying cheap properties in bad areas may be a good strategy for those who have limited funds, lack of financing, and higher tolerance for risk. Some people have no choice but to settle for a property with a not-so-good location in order to be able to buy.

  4. I wouldn’t disagree on a universal basis, Mathew. But those with the least money are almost universally those with the least experience and knowledge too. Poor location, high leverage, inexperience, and insufficient knowledge isn’t a formula on which I’d wanna wager.

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