I am dumbfounded by the high prices investors are paying for property.

44 Replies

This happens to me time and time again. I just got off the phone with a seller of a house in Florissant MO who told me that 5 other people made offers on his house and that my offer was less than half of what the next highest offer was.

I offered $20k on a house with an ARV of $100k. It needed $41k in rehab (and I know I can get my rehabs done for much less than most too.)

This means that someone else offered more than $41k. But why, how on Earth can they do that? Maybe my comps were off, but they can't be that far off.

Here is what the numbers look like with a $41k offer. And they accepted an offer higher than that.

$100,000 sales price

-41,000 purchase price

-41,000 rehab cost

-12,000 other cost

-----------------------------

= $6,000 profit

This is not a good deal. I have seen this happen hundreds of times in the last several months. Am I missing something? Why are so many people paying so much for properties now?

It's a seller's market.

Hedge Funds are swooping in and buying properties for minimal profit as a way to safeguard capital...

@John Skaggs

Don't feel bad, cuz it's not happening just in Missouri. It's all over. I'm in NYC and seller's will ask for some ridiculous amount, and more often than not, they'll get close to what they're asking for, if not more. 

But keep the marketing going, and fine tune it. Do A/B testing. You'll find people that are really motivated to sell, and will take your offer. 

Johnny

Owner occupants or Hedge Funds...

@John Skaggs Since this is a dead lead, why not share the specifics--address, maybe rehab details.

There will always be investors who overpay. Heck, I've been that investor more than once. Maybe they are doing the work themselves. Maybe they are new. And when there is lots of competition it is very tough to get a good deal even from a motivated seller. It is always best if possible to be the only investor at the table. How did you get the lead? How did the other investors get it? Bandit signs? Craigslist ads? FSBO?

One challenge is to keep track of your comps. I've scratched my head at how a guy could beat me only to find out later he sold the rehabbed house for a price higher than my ARV, which was based on past sales comparables. Here in Dallas it's a tight market as well and prices are increasing, so you have to put a premium on your ARV... maybe a factor of 1.2x what the comps are telling us.

The old ARV x 70% - Repairs model is a non-starter in most markets right now. Serious investors - not just newbies - are paying more to get deals and maybe not making the % they'd like, but as long as the ROI on their capital is acceptable, they'll do the deal... better to make a little money than NO money. The kids gotta eat!

John,

The seller was probably dumbfounded by your offer too. Kidding aside, 

@Dev Horn is right on cue with all his points. You stated rehabs are supposed to be $41k, but you can get it done for much cheaper. Well, I wouldn't be surprised other investors can do it for as cheap or even cheaper.  You have other costs at $12k while other investors might not have to borrow money so their other costs are closer to $5k. At $5k here, $7k there, things add up real quick. Also, buy and hold investors can afford to pay a little more since there's no real estate transaction cost on the back end.  As Dev said, the kids gotta eat. 

Cheers. 

Minh Le

    Sounds like the market has changed and you havent kept up .  You will never beat an owner occupant  buying for themselves . If you are getting beat by other investors , they may know something you dont . Or on the flip side someone will be losing their shirt .

    Owner occupants are buying rehabs here in DFW, simply because there is no inventory in the areas they want to live. On the other hand, owner occupants are ONLY buying listed properties. So, if you're competing with owner occupants, something is wrong with your model. In most markets, the days of finding deals on the MLS are over or at least on the extremely endangered list!

    @Dev Horn is exactly right about ARV's changing rapidly. There is so little inventory in DFW right now that properties - in areas of high desirability - are easily selling in less than a week at $20k above asking. That drives comps up quicker than we can track them in those areas. However, those purchases are 99.9% owner occupant, because market rents in those areas haven't kept up or caught up with property values. Also, I've seen several investors recently who have took a major haircut on properties, where they went too high on the ARV adjustments. What I've seen around here is about $20k over market/ask (for median priced homes) is about the max. It seems like above that limit people's common sense starts to kick in.

    I've been watching cash purchases in Northern Dallas County (north of Walnut Hill for those of you from around here), and there just isn't that much hedge fund activity here now.  It's investors, large and small.  Just find a target market for your marketing that has as little investor pressure as possible.  We've stepped up to a slightly higher price point, so that we have fewer investors to compete with.

    The same thing is going on where I live in PA, but not because it is an overly desirable area- just because there are investors that will do a rehab for REALLY slim profits. At the end of 2014 I flipped 4 rehabs to other investors.  They were all off-market finds, I settled on them, had my clean out guy go in and get all the junk out and then sent them out to my contact list for sale.  Not even exaggerating- I made $40,000 on one property just by flipping it to another investor.  I actually love it so much it has become my new model. All I do is relentlessly hunt for off market deals and flip them to investors that are willing to pay more.  I never have to worry about working with contractors and the profits are just as good.  I see a lot of investors that will work on them themselves (I don't). And a lot of investors, that unfortunately, are doing really shoddy rehab jobs (I've seen them-they are terrible). But to the shoddy rehabbers credit- we are living in a society where people just want stuff to look pretty. They don't care about quality. These guys are using low end products to not even rehabbing at all. I walked in one rehab that they just staged REALLY well. If you didn't lift anything or look closely, it looked great.  But someone bought it. I pity that buyer on settlement day when they get into that thing and its empty.

    Once in awhile I will keep one and rehab it fully. But it is rare these days. You definitely have to be working the off-market leads and putting them under contract fast. In my area there are people that will flip for a 6k profit all day long.  I would never. But I try to use it to my advantage and sell them my stuff instead of rehabbing it myself :)

    Its the same here in the Chicago Area. I get most of my buy and hold deals from people I know and not from the mls. Making contacts is key. I will have someone come up to me and say "Hey my friend wants to sell his place, would you be interested?" I say sure and work out a deal so he/she does not have to get a realtor involved. Most of the time it works. Prices are inflated again through the MLS and I can see a bubble starting to form especially in the near northwest suburbs. I can tell you that southwest Michigan is still one of the few places that flippers and buy and hold works and the deals are still very good. I am thinking of expanding to that area as all of my family still lives there.

    Seattle market has gone crazy. Just had an agent tell me about a great investment opportunity, $400K+ for a duplex that is currently in a B- neighborhood and is currently garnering $2,200/month in rent from a couple Section 8 tenants.

    His manager was calling it a great investment buy because the rents would cover the mortgage with about $400 left over. There was no accounting for cap-ex, vacancy, turnover, etc.

    I ran hard and fast and noted to myself to ignore anything that agent's manager says.

    In allot of places what I am observing is the the real estate market is on a come back. Nationally other investments are paying between 1.5% and 2% so more people are looking at real estate. More people are willing to do deals at a 10% -15% gain and not demanding a 30% gain as in many of the past years. I am taking a real close look at the deals being offered by wholesalers here on BiggerPockets. They look great on the surface but when I do my own due diligence that 40% unverified and unresearched gain offered by wholesales gets down to around 10% many times. All I can say is keep up with the time and do your own due diligence and come up with your own figures do not accept figures provided by other unless they are known to you and trustworthy. 

    We have always known of the good deals so do not be surprised others have discovered our niche and building up allot of competition. This is the age of the internet where anyone can access what up to now has been our niche. More owner occupants are willing to pick up a hammer and learn to project manage. For example when I first got started here in the San Francisco Bay Area everyone would run when they saw a fixer upper but now large crowds show up on open house day and many are anxious to realize that 10% discount from ARV and as the supply dwindles many offer above ARV prices.

    Its the natural market forces at work people. Those D properties everyone is now damming all to hell may look like jewels in tomorrow's real estate markets. Stay up to date in your market areas. 

    Where I might never venture or desire to invest outside of my local area I am not seriously considering moving out of state for a while and invest in other areas. Natural forces at work, increased competition, increased property prices, more people becoming knowledgeable, getting educated, being introduced to and understanding real estate investing etc. etc.

    I'm seeing that too. Absolutely crazy prices and houses that are a wreck going for over asking price.

    It seems like this thread is more about flipping than buy and hold type purchases, but I just wanted to throw this out there:

    It's also a lot harder to find cash flow deals for us buy and hold folks. I'm sure a lot of it is investors who are willing to accept a lower ROI than they did a few years ago. However, I speculate that perhaps some of that is people doing 1031s. If you sell one property for a GRM of 16x rents, and 1031 it into a property with a purchase price of 13x rents, you can be improving your ROI even though you're still paying "too much" according to my rule of thumb (that being, don't buy for more than 10x rents). So in that case, an investor sees you paying 13x rents and says you're paying too much, but in actuality, you're getting a fairly good deal because you're improving your ROI.

    Just a thought.

    I know first hand that hedge-funds are actually creating programs where they find RENT TO OWN candidates, they help them select the house and then the hedge funds buy and rent the property back to them. This is letting them acquire properties higher than most investors and reselling above market value. 

    Let me re adjust your model, 

    $100,000 sales price

    -41,000 purchase price

    -41,000 rehab cost

    -12,000 other cost

    -----------------------------

    = $6,000 profit

    Purchase 41k + 41k rehab +12k = 94k COST

    Resale of 120k + Int% because they are now funding the loan.

    They collect a non refundable option and keep the property if the buyer defaults.

    @John Skaggs  interesting post and lots of perspectives. As @Larry T. noted, it would be good to have specifics of the property. My initial thoughts were in line with @Kimberly T. .  Your plan it sounds like is to buy for $20, rehab for $41, sell for $100 and profit $27 after carrying/selling costs of $12 (or maybe you would wholesale).  The guy who bought it may have been thinking:  buy for $50, rent ready rehab for $25, and rent for $11-1200 then rate term refi to get most of the cash out. They have a great rental, fully rehabbed with no near term capex.

    That is common across the US. One guy at our REI says "you can't compete with stupid money". He is right. It doesn't matter if you are a flipper or buy and hold, everything is inflated and here locally it doesn't appear to be slowing down. Appreciation for Lee County Florida was 10% so far this year. I just looked at my tax bills and want to cry. I am always looking but am in no hurry to buy. I would rather wait and potentially do nothing than overpay. At some point, the market will reverse. The buyers in at the top of the market will be hurt. We also have some RE companies marketing the "rent to own" where they advertise the customer can choose a house, an investor will purchase it, and then rent it with an option to buy. They are stating they will pay "market value" for any house the buyer chooses if the buyer is qualified. Some of these are backed by large hedge funds.

    John Thedford, Real Estate Agent in FL (#BK3098153)

    Out of state investors exercebate and overheat the market besides the hedge funds folks....

    My lord this is a fantastic and insightful thread.  Glad I clicked it!  Thanks, everyone!

    Originally posted by @Jai Sookhakitch :

    I know first hand that hedge-funds are actually creating programs where they find RENT TO OWN candidates, they help them select the house and then the hedge funds buy and rent the property back to them. This is letting them acquire properties higher than most investors and reselling above market value. 

    Let me re adjust your model, 

    $100,000 sales price

    -41,000 purchase price

    -41,000 rehab cost

    -12,000 other cost

    -----------------------------

    = $6,000 profit

    Purchase 41k + 41k rehab +12k = 94k COST

    Resale of 120k + Int% because they are now funding the loan.

    They collect a non refundable option and keep the property if the buyer defaults.

     Jai, don't share our strategy on how we can pay $20K more for a property and yet make double what a rehabber makes. :-)

    Buyers are speculating that prices will continue to go higher. It is almost as worse now then it was in 2008.  The buyers today (in Seattle) are not so much business minded people and are buying on emotion.  People are overpaying like crazy right now but it makes my properties raise in value! 

    I only buy low and sell high. 

    Originally posted by @Doug Silverman :

    Hedge Funds are swooping in and buying properties for minimal profit as a way to safeguard capital...

     Haha - hedgies are not buying $20,000 houses in need of a $40,000 rehab as a way to "safeguard capital"...lol. I promise - it's guys who come read an article or two on BP, listen to a webinar, and hit START button :)

    It's lovely to watch what's going on out there. It's going on at every level. I am valuing $5 million deals and have Marcus and Millichap, SVN, and NAI brokers calling to convince me that $6.5 is cheap. It's a circus...

    It's a great time to be a wholesaler! Yes you will get beat out on a lot of deals, but if you are getting off-market leads you can still find some with no or low competition.

    It sounds ridiculous, but I regularly get website leads where I am the only offer on the table. I don't know whether other investors aren't calling them back, or if I just responded quickly and confidently enough for them to know I can solve their problem and they don't need to get any more bids or what. 

    Then I turn around and sell it to those investors who are paying way too much. 

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