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The Top 8 Reasons Investors Overpay for Real Estate

John Fedro
4 min read
The Top 8 Reasons Investors Overpay for Real Estate

Choosing to knowingly overpay for any investment property may seem quite counterintuitive on the surface. Luckily for us real estate investors, there is way more value to be created than simply immediate financial gains. The motives of experienced real estate investors are typically to help others, grow their portfolios, and make smart business decisions. Then why would any investor pay over retail price for a property?

Below is a short list of some of the good (or bad) reasons you may overpay while investing in real estate.

The Top 8 Reasons Investors Overpay for Real Estate

1. An Appreciating Market

Speculating or guessing that your local housing market will begin or continue appreciating may or may not be good for business. A novice real estate investor may foolishly purchase a single family home in a “super hot seller’s market” with zero or negative equity in the hopes of quick appreciation. Is this deal inherently bad because there is no equity at the time of closing? The answer is it depends. Ultimately, this investor is gambling (not investing) with factors outside of his or her control in hopes that the appreciating market will continue and soon inflate the home’s value up to a considerable profit.

multifamily-markets

2. You’re a Long-Term Investor

Some investors are at the beginning of their careers and/or only focused on making large influxes of cash very quickly. Other investors are very happy to pay a close to retail price for a nice home that they can rent turnkey. Due to the fact these long-term investors plan to rent and hold the property for the foreseeable future, a total purchase price may not be as important as the monthly payments due on the property. Depending on the particular investor, and if he or she is able to break even or cash flow a few hundred dollars monthly, a purchase price at or above retail may make financial long-term business sense if it gets the deal closed.

Related: 19 Smart Tips to Help Sell or Rent Your Property — No Matter the Price Point

Pro Tip: Remember that while you are actively investing in a few certain properties, your time and energy may be taken up so that you will not be able to invest in better investments that come to you in the near future. With this said, aim to close the most valuable and profitable deals first before moving on to the skinnier deals.

3. Certain Kinds of Use

Will this investment property be for the use of you and your family? Will you use this property as a place of business? If the answer is “yes” to either of the previous questions, then you may consider paying more for this particular property due to the fact you will be emotionally invested and potentially living inside the property for hours, days, or months on end.

4. Using Property for a 1031 Exchange/Tax Shelter

In the event you need an end-of-the-year tax shelter or “like-kind of property” to invest recent profits, then you may decide to pay more than you typically would for the sheer convenience of this property being for sale at the right place and at the right time.

5. Gaining Access to Certain Communities

Occasionally I will find myself paying more for a mobile home if it is located in a mobile home community I have been trying to own within for some time. In these cases I am happy to overpay because this “cost” is outweighed by building a long-term and trusted relationship with this particular park manager. While no investor strives to overpay for any real estate, if there is a chance to build a long-term and trusted relationship with a park manager, I will take it if the deal is still quite profitable. By paying a higher-than-normal price for the home, we still make profit and help ensure this park manager will think of us down the road for future deals and opportunities.

seller-financing

6. Ability to Use Certain Types of Financing

The capital or value that exchanges hands at the time of closing comes from somewhere. Typically the purchasers or investors must obtain their own financing, credit, or cash to purchase the seller’s property. How much higher a purchase price will you pay for a home to not have to use a bank? How much higher a purchase price will you pay for a home if you are able to borrow money at half your normal interest rate? If an investor does not have access to large amounts of cash or credit, then structuring a purchase arrangement with seller-held financing or other creative means may be invaluable to some investors.

7. Local Fame or Prestige

Some cities have very desirable or popular properties that would cause an investor to gain a bit of prestige and honor for owning and/or rehabbing these famous properties. Some properties are famous because of historical occurrences, sizes and celebrity pasts — or they are simply well respected and honored within the community. An investor who can help repair and update a local landmark may pay a higher price for this honor.

Related: Getting to the Lowest Purchase Price Possible: The Skinny on Real Estate Negotiation

8. Inexperience

Ignorance, emotions, lack of planning, missing major repairs, listening to the lies of others, and shortsightedness all may cause a novice real estate investor to make mistakes and/or overpay for any particular piece of real estate. The Forums on this site are amazing if you have any specific deal questions.

In conclusion, ultimately the decision to buy is up to you. Please make sure that you understand all the benefits you are intitled to besides simple cash profits. As a real estate investor, it is important to make your business decisions based in logic, not emotion. With that said, sometimes paying a higher-than-usual price for a piece of property may make sense. Keep in mind your entrance and exit strategies before you ever make any purchase offers to buy any seller’s home. Remember to always make purchase offers that solve the problems your sellers are having and also aim to net you a considerable profit. From this point you can work one-on-one with your sellers to form win-win offers that work for all parties.

Investors: Has one of these motivations ever driven you to pay over retail? What would you add to this list?

Be sure to leave a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.