Why You Should Stop Walking Away from Imperfect Deals

by | BiggerPockets.com

So, you think you want to be a real estate investor?

As an agent, roughly 50 percent of my client base is made up of them, so I write a lot about investors and wannabe investors. I tell anyone interested to first learn as much as they can about it. And then, have an honest conversation with yourself.

Are you sure you’ve done enough research? Have you adjusted your spending? Or spoken with a lender? Are you familiar with the applicable metrics? Do you have realistic expectations when it comes to your market?

All of these things are imperative to consider. I’m not trying to make investing seem off-putting, but I am trying to help you get a handle on what it is and is not.

And here’s something fundamentally more important than anything else when it comes to investing: time is money.

The obsession with metrics (cash on cash, cap rate, 1%, 2%, etc.) often overwhelms investors, blinding them to the reality that the biggest enemy is time. Put simply, if you walk away from a deal to hit a certain metric, you just might lose big.

Related: 5 Ways to Know You’re Not Ready to Invest in Real Estate

man resting chin on hand looking as though he's deep in thought

Let’s say you walk away from an early spring deal on a $300K property. You wanted the price to be $5K to $10K lower than what the seller was ready to let it go for.

But realistically, in a hot market, there’s a good chance that by summer, you would’ve recouped that cost in appreciation. In Denver, for example, we’ve seen 6 to 8 percent increases year over year, and you would’ve almost definitely experienced as much in the next 365 days.

In fact, for a house priced right, you could be looking to gain an average of $18,000 to $24,000 by next year—that is, unless you choose to walk away because the seller is unwilling to meet your standards.

The same situation speaks to the critical nature of knowing your market. And it’s really important to know where you’re at in life, too.

I created an all-female investing group here in Colorado. I have two investors that gravitate toward properties in the Midwest (Oklahoma and Ohio, specifically). While appreciation isn’t as strong there, they are cash flowing $500 per month on long-term renters. This is appealing to them because they are closer to retirement and need that money.

Alternatively, in a market like Denver or Colorado Springs, real estate prices have skyrocketed. Rents have increased to be sure, yet making $500 in cash flow is difficult—if not unrealistic—with a long-term rental.

Related: 7 Tips for Getting a House in a Hot Market (Like Denver!)

woman behind window smiling drinking coffee in cafe

But if an investor planned on holding a property for the next five years, it goes to stand that it would appreciate. And eventually, it just may cash flow because rents will surpass the mortgage. In the meantime, you may have to pay $100 to $200 out of pocket, but someone else is paying the bulk of your mortgage and/or cutting down your rent significantly.

Is chasing appreciation a fool’s errand? Maybe. But you can look at a city’s health and make some assumptions.

For instance, even though buyers are getting a little more power in Denver, the city still has all the hallmarks of a place with increasing home values: lots of out-of-state money flowing in, diversity of industry (i.e., healthcare, tourism, tech, and marijuana), and a very educated workforce.

I know, I know. To even suggest an investment that doesn’t cash flow is heresy, but similar to most money endeavors (ahem, the stock market), getting in early is the key to long-term financial success.

What doesn’t work so well is walking away over and over again because you fear you haven’t found the perfect deal.

Have you walked away from an imperfect deal and regretted it?

Comment below.

About Author

Erin Spradlin

Erin Spradlin co-owns James Carlson Real Estate. She loves working with first-time homebuyers for their enthusiasm and excitement, and loves working with investors because she's a fellow spreadsheet nerd. She and her husband own three properties in metro Denver and are currently in the process of acquiring a duplex in Colorado Springs. You can find Erin's blogs here: https://www.biggerpockets.com/renewsblog/author/erinspradlin/ and her airbnb video series here: https://www.youtube.com/playlist?list=PLgSUZKLPRI9tK3Vd-qpH3Sk2Rh-_pIrNN.

18 Comments

  1. Katie Rogers

    Waiting for appreciation is like going to Las Vegas. Ask anybody who invested in Santa Barbara or Ventura a few years ago, and had their investment wiped out by the biggest California fires ever. If they had accepted a negative cash flow situation, they were in a world of hurt.

  2. Christopher Smith

    It’s a balancing act that requires setting objective standards, but with some built in flexibility that varies with a person’s level of experience. So I do think there are hard and fast rules just the application of sound judgement in combination with adequate pre negotiation due diligence.

      • Katie Rogers

        You make your money when you buy, not when you sell. A hot market often means an overpriced market. The argument that you better buy now while you can still afford helped fuel the craziness last time. It is lamentable and possibly a leading indicator that agents have returned to this specious argument.

        • Erin Spradlin

          The argument is not to invest irresponsibly or to be naive on the buy side. The argument is that a lot of buying power is lost as interest rates and appreciation rise. It’s also that having someone pay down your mortgage (which you will eventually recoup) even if you have to pay $100-$200 out of pocket each month is still a way of making money by spending money. Make sense?

        • Katie Rogers

          If you pay too much upon purchase and continue paying too much month in and month out, you run the risk of NOT recouping the mortgage. In addition, if you are in a negative cash flow situation as a landlord, deferred maintenance tends to devalue the property further, because you don’t have the money to keep up with the maintenance. Even worse, appreciation is just paper value until you sell. There are people who are still complaining that their property lost value between 2006 and 2013, when in fact the property was never actually worth that inflated 2006 appreciation. A bubble by definition means that the prices are inflated relative to true value.

  3. Gloria Sheridan

    I agree with the spirit of this post, if not the details. For example, a year or so ago, I missed out on a 6-plex with separate water meters by just a couple thousand dollars. If I’d offered just $2,000 more, I probably would have gotten the deal. Dumb. The effect on my returns would have been negligible. I was fixated on “perfect” and learned that lesson. HOWEVER, the deal was still a richly positive cash flow situation. My returns might have gone from 28% CoC to 25% if I’d paid the extra couple thousand in purchase price. There is no way on earth I would have even been remotely interested in the property if the deal didn’t have significant positive cash flow. Period. Investing in “hot” markets, praying for appreciation, and losing money each month, is akin to buying a stock in a company that is losing money (so it won’t pay you dividends) AND then you have to continue to pay monthly to own that stock, AND then you expect that somehow magically somebody in the future is going to want to pay you more than you paid for that stock–and pay you enough to offset your losses AND your opportunity cost?? No way. That’s crazy talk. There are way more sure bets for your investment dollars out there. I say “bets” because that is exactly what you are doing with your investment dollars. When I make a property purchase, I’m investing, not gambling. I truly hope it works out for you.

    • Erin Spradlin

      if you are willing to be in certain markets… I think there is an idea that cash flow can happen in any market, and in really hot markets, that can be extremely challenging/unrealistic. (I have clients that do cash flow, but they live in the unit and rent out different rooms to many different people to make it work.) I know everyone wants to see $$$ but there is a reality that needs to be addressed in some of these markets.

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