The Best Way to Win in a Highly Competitive Market: Overpay

6 Replies

I've developed over $100 million in commercial and investment real estate in my career and I've got some unconventional advice you won't hear everyday...if you want to win in an ultra competitive real estate investment market...overpay.  

Before you tune me out as a crazy contrarian...let's consider some reality check perspective...

The road to real estate success is paved with countless golden tales of auction bargains, foreclosure and shortsale deals, distressed property below market buys, off-market steals and great negotiation tactic strategies.  Everyone seems to have a story...so why is it that finding a great real estate deal often seems so daunting and difficult...?  

There are of course, deals to be had in every market and we've enjoyed our fair share...but what do you do between the one-in-a-millions...?   Without question, the real estate investment market has generally gotten quite crowded, competitive and even saturated...especially in multifamily.  A great apartment developer friend of mine, who has been in the game some 50 years and has successfully developed thousands of units, recently estimated that he believes some 10%+/- of Atlanta residents now consider themselves real estate investors in some capacity...that's over 500,000 people if your counting.  Whether he's right or not is largely irrelevant...the fact that the perception even exists is telling indeed.  

I attended a duplex auction the other day in South Florida--some 80 people showed up before I lost count...and nearly all registered to bid.  They were not the usual suspects...moms carrying babies, retirees, young couples just out of college (some still in high school I think!), grocery story and machine shop employees in uniform...I estimated that maybe 10 or so were seasoned investors.  When the auctioneer asked how many were attending an auction for the first time, nearly half the crowd showed their hand.  (Bonus advice...never show your hand.) 

How can anyone investing using hard disciplined numbers possibly win in that kind of environment.  Someone less experienced is bound to overbid investment grade pricing through emotion and/or lack of experience.  

The answer...work harder, be more knowledgeable and be willing to overpay for the right deals.

Starting bid on that duplex was $100k, turn-key NOI profit ended at $250k (investors out), the easy to access online sales comp market value was $285k...once the bid crossed market even the newbs reluctantly stopped bidding.

We won the auction at 10% over current market.  Everyone applauded, then looked at us like we were crazy (and maybe we are).

Look closer.  The duplex in question had great potential and attributes. Ideal central location (with new Class-A all around), very nice neighborhood, good bones, easy conversion from 2/2 to 3/2 units, good rent comps, high potential rent increases through capital improvements, no title issues or liens conveying clean title and warranty deed, well-liked long term month-to-month tenants paying well-below market rents.  The current numbers didn't work at our buy price, but everything else did.   Most would call this speculation...I call it doing what it takes to get the upside.  

This is of course, a numbers game, but sometimes getting lost in the numbers alone means not being able to look beyond what you see and closing a great opportunity (that's some great Lion King wisdom right there!).  I don't really like to buy on speculation or potential, but in certain markets, you have to be willing to do the hard work to beat the competition and take on a bit more risk.  We saw things in this property that others did not, or at the very least, were willing to take on more risk to get the deal.   Sometimes you gotta break the rules to beat out the competition...just be certain that its the right deal and you know what you're doing.  

We did this on another property a few years back. Asking was $250k, NOI max price was $285k...we beat out 9 other offers by breaking the psychological $300k barrier and buying at $305k (yup, $55k over asking). After $150k of reno, property currently does $85k gross/year with an NOI of $59,500 and is currently worth $850k at a 7-cap. Guessing a couple of those other 9 buyers wish they'd ponied up that extra $20k.

Whether it'll pay off this time remains to be seen...now the fun begins...who's ready to reposition and force some value!

Very interesting strategy, and definitely goes against the grain.  It almost seems as if you're not overpaying though- if you have the vision to see what you are able to do to the property in order to increase value and rents, and are experienced enough to estimate the return accurately... You're just purchasing the 'good deal' that you envision in the future, instead of the 'bad deal' that is the present!  If you're patient enough and have the funds to do what you're doing, I think it's an excellent idea.  Estimating rehab costs and projecting future rents properly sounds like an absolute must though, with little room for error.

You absolutely nailed it Jimmy. Having vision, understanding rehab implications and knowing the market cold are key to making this work.  Institutional investors do this all the time in prime markets...they will pay top dollar, with a clear highest and best vision.

Certainly not for the faint of heart, but in some ultra-competitive markets, faithfully sticking to a conservative approach and rule-of-thumb numbers often leaves investors sitting on the sidelines, frustrated and empty-handed. 

So @Christian Cascone that is an interesting strategy. I second @Jimmy Watson 's statement that I don't really see it as "overpaying" but really more value creation. You have a vision, strategy and know how you are going to create value over time. The other great part is you have the experience to know which properties are worth your time to create the value and which ones aren't! Kudos to you! 

Appreciate the kudos @Marvin McTaw

So I spoke to the city's P&Z Senior Planner and he confirmed that based on current zoning and lot size, the city will allow us to add a third unit to the duplex!  Never ceases to amaze how taking the time and effort to put in good due-diligence work can pay huge dividends.  

Originally posted by @Christian Cascone :

Appreciate the kudos @Marvin McTaw

So I spoke to the city's P&Z Senior Planner and he confirmed that based on current zoning and lot size, the city will allow us to add a third unit to the duplex!  Never ceases to amaze how taking the time and effort to put in good due-diligence work can pay huge dividends.  

"In preparing for battle I have always found that plans are useless, but planning is indispensable." Dwight D. Eisenhower

Seems I'm not the only one who's had this realization...

http://www.themichaelblank.com/how-over-paying-for-an-apartment-building-can-get-you-a-deal-in-real-estate/

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