Why I Often Pay More For Property Than It’s Worth

by | BiggerPockets.com

So – what about the title of this article?  

I bet many of you are thinking I’ve lost my mind.  Come to think of it, you are probably more right than not, although this has less to do with real estate and more with my in-laws…

Yes my friends, I do indeed believe that there is a time to steal and a time to pay more than you know the asset to be worth.  As I’ve said before, the essence of creative finance is our ability to see what others can not.  To most real estate investors, getting a “deal” is strictly a function of paying a low purchase price.  Not to me, because while a low price is never a bad thing, I recognize that price is only one piece of this puzzle; it is only one of the negotiable terms which add value in a transaction, and focusing solely on the price can lead us to ignore possibilities which exist elsewhere.

Furthermore, an open mind and a willingness to pay more than your competitors so long as you receive value in excess for doing so does in fact position you favorably relative to those competitors.  Is not this what we want – an edge over the competition?  Well – let me tell you, all they are looking for and at is how to get a steal on the purchase price; that’s because this is the only way they know to make money.  You take equity at the time of purchase off the table, and vast majority of your competitors drop off the face of the Earth – lost, confused, and unable to find a way.  Not us…

Allow me to assure you that the journey of thought I will be taking you on in this article is not simply some silly academic exercise.  I have in fact paid more for property than I knew the property itself to be worth on occasion; turned out pretty well for me – believe me.  Starting out with not much, as I did, and assembling a portfolio within 7 short years of 28 units with gross rental income of just under 200k and Cash Flow of about $40,000 – while under 100% financing at the front door, requires some perspective.  I’d like, if you will let me, to share with you some of what I see.  Here we go…

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Ease of Access Through Seller Financing

So – real estate investing is a cash intensive sport.  We all know this and nobody disputes it.  Qualifying for loans is difficult, and so is coming up with down-payments.  Therefore, common sense dictates, at least I hope that it does, that any and every tool which has the capacity to alleviate the burden of financing indeed has value and we can expect to pay for it.

While far from being the only tool, owner financing is likely the primary tool in this department, specifically for the beginner investor.  The absolute great advantage of owner-financing resides in the fact that all of the terms of purchase/sale (and I mean ALL) are totally negotiable – this is powerful indeed…

Let’s say you are looking to buy a 4-plex that is reasonably worth $150,000.  In order to finance it conventionally as a non-owner occupied investment property you would most likely need at least a 25% down-payment; likely 30%.  This puts such acquisition out of reach for a lot of you – doesn’t it?

Now – there are some people out there who would say that if you don’t have the money for the down-payment, you shouldn’t be looking to buy this building in the first place. Personally, that’s some of the stupidest thinking I’ve ever heard of.  Putting your hard-earned money on the table in general is best described as investing for dummies.  The reason we study and learn is precisely so that we can bring value to the table without needing money.  I don’t know a single syndicator who puts their money in the pot (at least not much), and for the life of me I don’t get why smaller investors feel so committed to putting money down (i.e. putting money at risk).  If the deal is good enough you shouldn’t have to bring much dough to the table, and if it’s not good enough you shouldn’t be doing it…

You make your own call on this, but I prefer to find deals that don’t require such a down-payment, but there is usually a price to pay elsewhere – most often a higher purchase price.

Question: Would you pay $165,000 for this 4-plex knowing that it’s only worth $150,000 if that meant that your required down-payment would be 5% in lieu of 30%, and that you wouldn’t have to deal with a bank on the rest?

Answer: Obviously, all of the usual metrics would have to be acceptable at the higher price-point, but I would pay $15,000 for the benefits represented by owner-financing in this case.  In fact I have, and it cost me less than $15,000.  Would you…?

Owner-financing is not at all the only way to go, but likely the best way for a beginner.  Now – you are not likely to get this done on an MLS listed property, and you might have to learn a thing or two about negotiation, but this is very doable in the world of owner-financing and it can be highly advantageous for both sides indeed.


You’ve heard me and others repeat many times that real estate investing is a relationship business.  This is a powerful statement indeed once you truly understand what it means – do you understand what it means?

Just in case, allow me to give you my thoughts.  What “relationship business” is code for is that if someone likes you, trusts you, and believes in you, they will be willing to open doors for you that otherwise would be shut – period!  And this applies to sellers, buyers, and financiers alike…

Question: If you had reason to believe that the seller of this 4-plex has capacity to become a private lender to you on other acquisitions and that this 4-plex is your “test”, would you pay an extra $15,000 for the possibility?

Question: If you knew this seller to own other property that eventually will be in-play, would you pay $15,000 for the relationship?

Question: Would you finance a little 3/2 house with a 20-year commercial portfolio note at 7% while the going rate is around 5%, if it required no money out pocket and if you believed that this lender is capable of doing hundreds of thousands of dollars with of deals for you and this little house was you “price of joining the club”?

Obviously all of this is relative and the deals must work, but if so – would you pay?

Answer: I have done all of the above.  You didn’t think I got to where I am without paying the price of entry, did you?  And yet – here I am…


In my brand of real estate investing I search for terms and not bricks and mortar.  Let me say that again – I search for terms and not bricks and mortar.  As a consequence, I would willingly give on the purchase price if other terms in the transaction compensate and exceed that value.  In my experience, mine is a rare perspective indeed because it requires a higher degree of awareness – you must see past the immediacy.  However, an ability to see that which others can not certainly can and does provide for competitive edge…

Thanks for reading guys.  So – would you ever overpay?

Photo: Tax Credits

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at JustAskBenWhy.com.


  1. Randy Phillips on

    I like your article, and yes I have Lease optioned houses for the balance owed which was much more than the present value. These deals were easy to flip to a new buyer because they didnt have to qualify for a bank loan.

  2. Ben – Such good timing with the content of this article. I put an offer on a property with this same exact concept just last Friday! Unfortunately the seller didn’t have the ability/capacity to finance the deals. Hopefully better luck next time.


  3. I like your phrase, “price of admission”. I have been a buy and hold landlord for almost 15 years. When I started I was immediately put into commercial loan status because I told them my goals of having many more than the 4 or 10 Fannie could cover. The rate was about 2% higher than the then current mortgage rates. That was the “buy in” or “price of admission” to play with them. Now 15 years later they hold in house about 45 SFH mortgages with a 5.75% rate (just refinanced most of them). I have proven myself and thus I am not limited by an ability to obtain financing while many others in my market are. I am still buying and plan to keep it up for years to come.

  4. Great Article Ben!

    In dealing with investors here in the Charlotte NC area I am running into alot who which to “Steal” a property rather than pay my option fee which not far from a Steal! I had a Fixer upper duplex on the market here for $9500. This is a far cry from the California prices I use to deal with. I spoke to the investor on the phone and she agreed to the $9500 price. Now the deal was seller financing with the following terms ($500 down and a little under $200 per mo.). On this deal I was merely going to make about $400 dolllars because there wasn’t any equity in the deal after fix up. Once we all agreed, the investor sends me an offer the next day for $9200 and $400 down. After repairs of 25k the deal would have cash flowed nicely. Myself, the seller and the investor were all on the same page. Now after getting an offer like this I was a little bothered. So i ended up cancelling with the investor and re-marketing the property. It was no longer about the property, it was trust. Don’t say 1 thing and do another. Ben, your article has encouraged me to be more of an investor than just a wholesaler. I would be able to create more win/win situations with sellers! Thank you

      • Actually the investor I was dealing with has several businesses in the area. But yes, she doesn’t understand that trust is everything. Sad part about it is many investors want the “Slam dunk deal” not understanding that this business is about future deals and future relationships. I could eventually have added 5 to 6 figures to this person’s bottom line in 2014. Not to mention a long term relationship. This just motivates me to do more.

        Happy Holiday’s Ben, to you and yours!

        • Hi Gerald,

          You did the correct thing in canceling the deal. Like Ben often says, real estate is relationship business. If the investor flip flops on their decision, it ultimately looks bad on you when you have to present that to the seller . Although the investor may be doing a alot of deals, it doesn’t mean they are doing it the right way(they may have a lot of money to blow) . Trust and integrity are everything.

  5. Great post Ben, I am not a big fan of paying a lot of interest. I even go with 15 year ammortization schedules for all my financing. It fits my goals well. Within the last year I have transitioned into commercial mortgages. My last 2 this year have been at 5%. The rates are higher than conventional but I am now able to buy a property with short term seller financing or acquiring private funds, then remodel the property, place a tenant and secure a 15 year note with a commercial note with either a little cash in or even cash out. They are financed at 70% LTV for a max. I don’t have to have a year of seasoning. Just a tenant in for a month or so with a lease and a BPO. Whole process takes a couple months from purchase through rehab to secured financing. Learn what you lender wants and present your financials clearly. Be the easiest client that they work with and everything has gone very smoothly. I see no limitations to continuing on this path and that is a pretty good feeling….

  6. Hi Ben,

    Could you please elaborate on why paying a higher price and no downpayment is better that paying a lower price with downpayment?

    You say that having a downpayment is placing your money at risk. But isn’t your risk the same regardless of the downpayment? You have to pay that mortgage no matter what and if the property sale cannot cover it as in your example (150K FMV vs 165K purchase price) you are on the hook for the difference. So, instead of having a positive equity in the deal from the start you have negative equity.

    Am I missing something here?


    • Nick –

      Safety in a deal. otherwise described as ability to hang onto the deal, has nothing to do with equity and everything to do with cash flow. Look, staying in the game requires the following:

      1. Stable gross income in excess of expenses resulting in strong CF.
      2. No contractually mandated time-frame on the sale
      3. No financing contingencies that would force the sale
      4. Enough liquid reserves to handle day to day “shit happens”

      Thus, if my intention is to keep the property, and if the underlying financing accommodates this, presuming the CF and the rest of the numbers are satisfactory at the higher price-point – why would I care if I am 15k under, which will self-amortize over time?

      #4 on the list is why I prefer to not make down-payments. Makes sense?

      • Yes, that makes sense. I guess you don’t care about your negative equity as long as you don’t need to sell that property and CF is positive. Would the same logic apply to a larger scale?
        Say, you find a 15M deal that has positive cash flow and you could pull off no down deal if you pay 16M instead of 15M (still positive CF). Would you take such a deal knowing that negative equity probably exceeds your entire networth?


        • So – this is basic to multi-family. The value in multi is a function of income:

          Value = NOI / CAP

          If I am buying the property it is because I believe that I can drive the value up via driving the NOI up. Thus, if the property currently is worth 15 mil., but I believe that I can drive that to 18 mil., then in order to put the deal together in a way that builds value by way of financing, lowering the DP, or any other value, then sure – I’d consider paying 16 mil.

          The deal has to still work and I must be, as I mentioned in the article, receiving value in some shape and from that is in excess of the premium that I am paying. Makes sense?

  7. Ben
    Thanks for the great article. I love that even though I generally disagree (Im one of the idiots who puts 20% down) I can still pull tons of valuable information from your posts. My only thought would be that if you were to be a bit more patient, could you not find deals that you could structure with little or no down payment, but still have equity from day one? Those deals are out there, at least in my neck of the woods. I have equity and cash flow in all of my rentals, and that would still be the case if I didn’t put 20% down

      • Ben,
        As always, another great article. Any time I see something you write, I go immediately to it because I know more times than not, there will be a unique nugget or something different than what you will read elsewhere. I totally agree w/ your article because at the end of the day growth and income are the most important things IMO.

        • WOW – thank you indeed Pete! Incidentally, I never try to write differently for the sake of being different. I write what makes sense, and if that happens to be out of the mainstream then be it. I really do appreciate that my perspective is reaching and making sense to you and others.

          Again – thank you for reading my stuff Pete!

  8. Hi Ben, thanks for the article,

    I like the way you think, I’ve been taught to put 20-30% down and cash flow if i’m lucky $200/mo., thanks for the importance on working on relationships….thanks.

    • Will –

      I know I am out of the mainstream with a lot of this. If you ask most investors, they will tell you that down-payment is necessary for these reasons:
      1. It is a requirement by the traditional financiers
      2. It is a way guaranteeing safety in a transaction
      3. It is a way of creating or amplifying the CF

      All 3 may be true in some way, but it doesn’t make it right. First, we shouldn’t be buying safety with cash – we should find other ways to achieve safety. Secondly, we should never buy CF – we should create it. And lastly, the essence of creative finance is precisely to avoid writing large checks. What are your thoughts?

  9. Hi Ben

    It’s funny you said writing a large check, I saw a 3/2 in Pittsburgh the owner wanted $50k and he wrote in craigslist that he would owner finance it with $10k down, I was thinking maybe $5k down and add the remaining 5k to the purchase price. But with this article I can have multiple scenario’s to think about.

    Thanks for the great article.

    • Justin – that’s a loaded question and an important one. The answer is much too involved for a post like this because in order to understand how to increase value you must first understand the drivers of value in a specific type of property .

      For starters, listen to BiggerPockets Podcast 14 – I touch on this in the show. Also, I have an eBook on Kindle dealing with some of these things and much more info on my site. PM me for more info if you are interested.

  10. Ben, Thanks for the post. Quite literally, the day you posted this, I had located a great deal, but was short on cash for a down payment. I offered about 8% more than the asking price w/ a 95% seller financing. While I don’t have a signed agreement yet, the seller has sent my terms to his attorney for review.

    • James Colley

      This is what i was thinking of doing. Problem is in doing so, or even paying more than 70% ARV, i lose my advisory board of which one member is my national title company I’d been planning to use as part of my team, as well as anything else he could offer me help on including the possibility of funding for future acquisitions. I’ve been trying to get into them game via connected investors but nothing’s played out except for a bunch of referrals to affiliate marketing and invitations to thousand dollar mentorship opportunities. I have a few opportunities I want my LLC to acquisition, one of which I have under contract, a package deal of three houses that are in probate and too early in the game to contract, .and my baby a I call it which is a $1.9 million asking price for a package of 93 houses and 1 duplex that currently brings in $47k gross every month. That one alone could make me retire but I want to build my portfolio even higher than that. I want .to have at least 1900 units in combined sfr and multi before its time to celebrate my life and leave it to my children

  11. Good stuff Ben.
    One thing that can be tough about overpaying on some things is if you NEED to sell it fast for some reason.
    In the example you used it was a 4-plex so still considered residential. Your philosophy will work much better with commercial because the values are based on the income.

    For example lets say that this 4-plex and an 8-plex all have the same size units and they are all renting for an average of $700/month but market rent with just some minor TLC should be $850.

    In the 8-plex you would be buying $700 x 8 = $5,600/month using the 50% rule leaves $2,800 and an annual NOI of $33,600. Buy at a 10% Cap you should pay $336,000 if you go $30K over (To keep it fair overpay double the amount you would on the 4-plex) that is $366,000.
    If you go in and put in a minimal investment to spruce up the units and raise them all to market rents of $850 then your value will basically go up to $850 x 8 x 12 x 0.5 = $40,800/.1 = $408,000.
    Which is a cool $42,000 of equity above your $30,000 overpay. GREAT DEAL!
    Even if your world got turned upside down and you needed to sell right away you should be able to get out of the place without any real problems.

    In the 4-plex do the exact same thing. Cash flow gets a lot better to the tune of $600/month on a small property that was probably doing pretty well originally. No doubt that you turned around the asset to be a far better investment than it was before.
    If you need to sell and no other 4-Plex in the area has sold for over $150K you are going to have a really hard time getting out of this place without getting killed if you paid $165K on it as it won’t appraise and if your buyer needs a loan that is a killer.
    Given you don’t have equity you can’t seller finance to your buyer unless you sell it Sub 2 or something like that.

    • Shaun – Brandon and I were just talking about this last night (we do that, but don’t tell Josh cause he thinks that he keeps Brandon busy enough so that there’s no time to talk to anyone 🙂

      Of course you are absolutely right, and this is why I play exclusively in commercial space – forcing appreciation is a much more logical process in a space where the value is a function of capitalization. Here, though, the majority of the people reading would relate better to a 4-plex than a larger project, and since first and foremost what I’m doing is teaching a lesson, I use examples that folks can wrap their heads around. But, you are right indeed Shaun!

      • James Colley

        I’m new to DP and I like what you say hear cause I’m stuck on an acquisition that everybody I’ve put in my network says I’m absolutely nuts for wanting to do, which is pay more than 70% ARV. Granted there’s a difference between a multi-family building consisting of 94 units and a package of 93 sfr and 1 duplex, but this is my dream come true and if this is as big as my portfolio ever gets, I don’t care cause I know that one day I will own all these free and clear and could live comfortably on $47,000 gross income minus property tax and insurance. It seems like everyone I’ve chosen to network with on .connected . investors are wholesalers only and don’t see what I see for my future. But this would be a hell of an entrance into REI career as my first acquisition for my LLC’s portfolio, second one personally as Ive had à sfr for a couple years now.

  12. This is the second or third article of yours, Ben, that I’ve read. While I’m impressed by how well you do working with little or no money down, I feel like the articles are a bit vague. It’s not just the terminology, which as a beginner is still confusing to me; it’s the way or lack of the way negotiating “owner financing” is actually described. How does one go about even talking to the owner about it? What does it actually mean? I understand that you are saying pay a little more to get them to “finance” your down payment, but how do you write that in the terms?
    In your articles, it might be really beneficial to us as beginners and learners to see hard facts, terms, figures, or even fictional situations where we could apply the techniques you mention.

    • I recently submitted an offer and the offer was contingent on owner financing. On the standard offer paperwork, I simply checked the “Financing Contingency” box and wrote: Owner Financing at 95% of my offer, which was $10,000 more than the asking price. In the notes section, I outlined my preferred terms:

      95% owner financing at 5%, amortized over 30 years, due in 2 years.

      I then proceeded to outline how the owner would make the same amount of money over the two years with the financing package as if he still owned the building, but didn’t have to deal with the hassle of the residents in the building.

      Ultimately my offer was rejected.

        • Hi Amelia,

          The resource for contract paperwork is your attorney. And as to you earlier comment, what I would need to do is to teach you how to negotiate – I can’t to that in an article format nor do I even want to try. If you are interested in knowing why some people get objectives accomplished in negotiations while others do not, I suggest you read Aristotle and Socrates. Understanding human psychology and mentality is requisite… Please feel free to check out CFFU as well.

          Thanks much!

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