Would you overpay? Is there a such thing as "over paying"?

[Jeromy Jordan]

Would you overpay for a deal? Most offers I put in for a deal(on market and off market) does not get accepted and that is ok with me. The first thing an Agent or wholesaler tells me is "You don't know the market" "its a sellers market" "the 75% rule or 80% rule for BRRRRs don't work anymore" My answer to that is "so what". I understand its a sellers market and there are bidding wars on everything and things are "not like they used to be". And I also know that insurance premiums are steadily going up, property taxes are high, and the cost for goods and services(contractors/materials/specialty techs etc) have gone up as well...The numbers are the numbers and if they don't work out, why would I overpay for something. I can afford to wait and be patient to find the right property with the right circumstances. For example, in the market I invest in, I found a deal for 30k less than what the avg fixer upper is selling for. I was in the right place right time, in the right situation with a motivated seller and got the deal. It obviously was a little luck involved in finding/getting this deal as well. I feel like if you be patient and continue to hunt for deals something will come along. Also I am still young in my investing career(only 4 properties so far) so my risk tolerance may be different than a more experienced investor. But I feel like some agents/wholesalers are reluctant to work with me or insult me by saying "I don't know the market" just because I'm not offering what everyone else is offering.

I would really like to hear experienced investors and beginner investors opinion on this. Am I doing something wrong? Running my numbers too conservatively? Should I pay what the current market is demanding?

[Jay Hinrichs]

Originally posted by @Bill Brandt:

@Jeromy Jordan

You can’t use a profit percent because it goes out of wack with so many variables. 

Property a) $50k, 100 year old, class d housing in the Midwest with a 10% profit margin, $5k per year. But you have lawn care, tornadoes and thunderstorms, snow removal, painting, high property taxes, high insurance, state income tax, high turn over, old fixtures, structure, appliances, plumbing, electrical, roof, etc etc etc. 

Property b) is a $400k, 2 year old class b housing in the southwest with a 5% profit margin, you’re making $20k per year. But you have zero lawn care, snow removal, tornadoes, painting, very low property taxes and very cheap insurance with no state income tax and everything is new. 

Yes, it’s 8x the price and you’re only making 4x the money, but it is as close to passive as you can get, and you need 1/4th as many properties and tenants. With a dozen properties I don’t spend 2 hours a month dealing with them, and most of that is bookkeeping. There is no expense that’s going to skyrocket or come out of nowhere. For 20 years insurance has gone up between 4-8% per year. It runs about $600/yr for a $400k property now with 500/500k limits. Property tax goes up 3% per year and it runs about $1800-2200/yr. There are no roof repairs, no painting exteriors, no weather issues, 

Imagine you put down 25% and literally just broke even for 20 years until you paid the property off. It will have at least doubled even if you buy at the peak, in one of the most extreme bubble cities as a couple, of my properties were. That means you’ve made 700% on your downpayment. Not too shabby. 

Use your rental properties as your retirement vehicle. If you need your properties to produce a positive $100 or $200/mo cashflow you’re not in a good position to invest in real estate. That’s $1200-$2400/yr. That’s one kitchen appliance, 1/2 of an ac unit or 1/4th of a roof. Heck it’s probably one month’s vacancy or one turnover. 

I’m sorry it kind of went on a wandering disaster there. Try to find one valid point and concentrate on it, or ignore the whole thing. I’m almost deleted it instead of posting but it woulda felt liek even more of a waste. I just feel like you have way more control over real estate than the stock market or gold or crypto, and you can’t have it in cash. GL with whichever path you choose. Btu get started, it won’t be easier 5 years from now. 

Morning Bill from the banks of the Columbia River we dodged the tsunami :)  the opposite is true regarding Texas

you will have roof issues you will have weather issues in many areas you will have serious soil foundation issues and Tax's will go up and are very high.. what your describing of course is a poster child for why you must look at all angles of a Market your describing landlord heaven when it comes to on going maintenance and a state with No income tax like Texas and some of lowest property tax's in the US so when you add those all up the market you describe you can PAY more for the asset and in the long run come out just as well if not far ahead.. 

For the OP  just stick to his guns if he wants  a certain buying metric nothing wrong with that.  

[Bruce Lynn]

@Peter Tverdov   I am very value oriented, but I remember early in my career fighting for $1000 and loosing that one and a few others for what was really insignificant money in the scheme of things.  I could now kick myself...should have locked up all those properties and more.   Now I see it with clients....who tried to save $1000 or $2000 3-4 years ago and left $100,000 or more on the table at today's prices.   I guess I still have limits, but much more forgiving now.  I often say now the "deal" is the one you get locked up, even if you are paying more than you wanted.

[Bruce Lynn]

@Jeromy Jordan  I'm deal oriented too, but one thing you should look at is how much you leave on the table by not doing a deal.  I've had so many customers leave $100,000 or more on the table over the past 2-3-4 years because they would not pay $1000-$2000-$5000 more for the property.

Funny last summer when I had a number of properties for rent I would have tenants saying they were over priced?  I'm like I had 200 phone calls on this property this week and 30 showings today...what stats are you considering to think it is over priced?  If it is more than your budget I understand....if you think you can get a better deal down the street great, but it is not over priced based on the market.....probably underpriced based on the interest.

Everyone has a different perception of value....and you have to be comfortable with what you pay/buy.   One thing you have to consider is where do you think the market is going.....where do you think prices will be next year?  What interest rate can you lock in today?  Where do you think rents will go?   How many homes at this price are they building in your area, or any area?   Is the area on the way up or on the way down?   Of course all that is a guess.....we don't always know.....but then again we don't know at any price....lower or higher.  Lower may give you cushion/flexibility, but it is still a guess.

[Peter Tverdov]

Originally posted by @Bruce Lynn:

@Peter Tverdov   I am very value oriented, but I remember early in my career fighting for $1000 and loosing that one and a few others for what was really insignificant money in the scheme of things.  I could now kick myself...should have locked up all those properties and more.   Now I see it with clients....who tried to save $1000 or $2000 3-4 years ago and left $100,000 or more on the table at today's prices.   I guess I still have limits, but much more forgiving now.  I often say now the "deal" is the one you get locked up, even if you are paying more than you wanted.

 It's not going to matter 5-10 years from now if you paid 10k over asking for the property. It will likely be worth more and in this instance I'll have this property worth 100k more in about 12 months.

[Bob Metry]

@Bruce Lynn I couldn't agree more. I look back at all the deals I missed because I was being cute trying to negotiate a few thousand dollars. As I have gotten more experienced, if I am excited about a property and the location and the numbers work, I try my best to lock the deal up. Especially for properties I intend to rent and hold. I don't have any regrets on deals I bought but have a lot of regrets on deals I missed out on a for a relative small amount money.  

[Tommy Ray]

appreciation is the norm...  The component parts of a home and the transactional costs themselves are always going up.... 

[William Ryan]

I would and have "over paid" for a deal. Do you want to know why? Because many people consider anything over asking price to be "over paying". But at the end of the day most of these metrics do not include future growth or projections. If you know how to run a 5 year analysis and your numbers work then "over-paying" may be part of the plan. 

[Culin Tate]

The purchase price is only one side of the equation, the other side is what do you want to do with the property to earn income?

Yes, right now purchase prices are elevated, but so are short term rental rates.  Their is serious money to be made, even in a sellers market by increasing your gross revenues 3-4x the average long term rental income by deploying the right assets in the short term rental market. 

[Michael Spine]

I tend to believe that investing is always a good time. This market is much different than the bubble of 2008: large supply, high demand, speculators buying anything and making big profits in months. I hear many waiting until prices are lower and the market corrects. I'm not so sure prices will correct but anticipate they will flatten as the supply and demand normalize which may take years. With interest rates so low, waiting will most likely decrease your purchasing power and remorse of opportunities lost because you didn't purchase now. I have adjusted my criteria and feel comfortable because the numbers work today and hope that my projections work in the future. Best of luck to all. 

[Luciano A.]

@Jeromy Jordan

I too am in Houston. I moved here to buy real estate back in 2008 but started buying here in 2006. As someone originally from CA I feel like we are in similar market with everyone jumping into Real Estate and everyone optimistic about the market. 

Patience, knowing what you want and knowing what you expect will help reduce the shiny syndrome. If you have criteria that you only want 3/2 in suburban area like Katy but you get a wholesaler telling you he got a deal of a lifetime in Humble you can just pass because that doesn't fit your criteria. Staying focused will allow you to look at deals and make decisions faster. 

I think the idea that you pay more and hope next year or 5 years prices will be higher and rents will be higher is foolish. So many of my friends in CA had that mindset. They will overpay because the property had multiple offers but its okay because it will be worth more next year was their mindset. Some did really well while others got on the gravy train at end of the market cycle. That game is great when it's in your favor but someone will be left holding the ball. 

Everyone is chasing properties that need little to no elbow grease and expect to make $500 per month in positive cashflow. This old game of finding deals and turning into rentals is harder to come by. But as you pointed out, insurance, property taxes getting reassessed faster than in the past and finding good trades is becoming harder. These things can eat up your cashflow if you are not running all your numbers and using emotion to buy. 

What you are doing is great. Staying focused and know what you want will help you stay in this game a lot longer than the buyer who is banking on appreciation and rent increase while making $100 per month positive cashflow. 

I will pay the amount that I feel the property is worth. If it becomes a multiple offer situation I would use other strategies, like all cash, quick close etc to get the deal not going over my limit on what I would pay for the deal just to get the deal.

I have found all my deals on HAR.com and have not needed wholesaler to get me a deal. But I spend 2-5 hrs a day looking in between meetings, bathroom breaks etc. 

If you need an agent that will not complain PM me and I can get you in touch with my son who is a realtor and makes offers on my behalf all the time with no issues.  

Best of luck 

[Dan Heuschele]

Originally posted by @Lesley Resnick:

It is a fact net operating income are down on new purchases, all thing being equal.  I am generally not a big proponent of looking at appreciation, but given the rise last year and the projected 20% this year...  It is also expected that rents will increase as well.  This is note-worthy.  This is a long game and no one ever loses money in real-estate.  The only issue is the holding period and can you stay afloat that long?  Prices are now higher than they were in 2007 by a significant factor. 

This market requires a lot more subjectivity than it has previously.  What are the factors that are going to make this a good long term rental?  Location, schools, new construction in the area, etc. Would you be comfortable owning this in 10 years?

The last issue to consider is where else will you put your money, Stock Market, Dogecoin? Savings Account?  The batteries in my crystal ball are running low. I don't know where housing or other investments will be in a year, but I know I am sticking to my long term buy and hold strategy and it allows me to sleep well at night.    

 >but given the rise last year and the projected 20% this year.

Who is predicting a 20% increase for 2022?  The range I have seen range from -2.5% to 11%. 

zillow 11%, Fannie Mae 7.9%, Freddie Mac 7%, Redfin 3%,  Realtor.com 2.9%, CoreLogic 2.5%. and Mortgage Bankers Association's forecast model projects a 2.5% decline. 

I personally will be surprised, with the already announced rate increases, if the national RE appreciation is in double digits.  

[Lesley Resnick]

Originally posted by @Dan Heuschele:

Originally posted by @Lesley Resnick:

It is a fact net operating income are down on new purchases, all thing being equal.  I am generally not a big proponent of looking at appreciation, but given the rise last year and the projected 20% this year...  It is also expected that rents will increase as well.  This is note-worthy.  This is a long game and no one ever loses money in real-estate.  The only issue is the holding period and can you stay afloat that long?  Prices are now higher than they were in 2007 by a significant factor. 

This market requires a lot more subjectivity than it has previously.  What are the factors that are going to make this a good long term rental?  Location, schools, new construction in the area, etc. Would you be comfortable owning this in 10 years?

The last issue to consider is where else will you put your money, Stock Market, Dogecoin? Savings Account?  The batteries in my crystal ball are running low. I don't know where housing or other investments will be in a year, but I know I am sticking to my long term buy and hold strategy and it allows me to sleep well at night.    

 >but given the rise last year and the projected 20% this year.

Who is predicting a 20% increase for 2022?  The range I have seen range from -2.5% to 11%. 

zillow 11%, Fannie Mae 7.9%, Freddie Mac 7%, Redfin 3%,  Realtor.com 2.9%, CoreLogic 2.5%. and Mortgage Bankers Association's forecast model projects a 2.5% decline. 

I personally will be surprised, with the already announced rate increases, if the national RE appreciation is in double digits.  

I may be myopic in my view, since I only invest in Jacksonville...

Zillow names Jacksonville the second hottest housing market in 2022

Experts say the typical home value in Jacksonville is $314,569, and Zillow forecasts home values will rise 22.0% through November 2022.

[Courtney Bass]

@Jeromy Jordan appreciate your question- such an informative thread with diverse opinions and valuable perspectives. For me the point on losing out based on some amount that now seems insignificant considering the appreciation (and increases in rents) is golden. 

[Jeromy Jordan]

@Luciano A.

Sir I agree with every word you said. And I appreciate the encouraging words! I have to start checking out HAR.com. The 2 deals that I did capitalize on in Houston so far was just by word of mouth. Family bird dogs and such. They haven't come from a wholesaler so far. The agent that pretty much talked to me like I didn't know what I was doing didn't realize I just bought a property in the same area as the one his wholesaler brought me. So I knew the numbers and what works in that area. It seems like he just got irritated with me because I didn't give his wholesaler a full price offer for what they wanted. I understand that it's a business and everyone involved has to make a profit but at the end of the day I don't want to put myself in a financial hardship. I'll definitely reach out if something on MLS peaks my interest and maybe your son can represent me. Thanks!

[Jeromy Jordan]

@Courtney Bass

I appreciate that point as well. I guess im trying to keep my emotions in check at the same time. For example how do you come to that conclusion that FOMO(fear of missing out) is blurring the lines in your analytical decision making. I can afford to wait for the right deal but I can't afford the expense and headache of a bad deal

[Todd Goedeke]

@Bruce 

@Bruce Lynn when houses are over priced many times people are comparing existing homes to new constructed homes. If a newly constructed home can be built for $150  / sq ft and existing homes are priced at $200/sq ft the existing home is overpriced by $50/ Sq ft