Is Overpaying Standard In This Market?

Buying & Selling Real Estate
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Is Overpaying Standard In This Market?

Adah N.
Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes

House is in a B neighborhood in Atlanta area, purchase price is 370K. I thought I was overpaying a little, perhaps 5-10k. However, I see now it is closer to 25-35K overpayment. Worse, I wanted a house that was move in ready, this one is not. I still have to deal with the hassle of repairs/upgrade, exactly what I was looking to avoid right now. It is too late to back down without losing my EM(4K).

Yes, it appraised but what the heck are appraisers doing? Is overpaying by 10-15% a big deal or is it pretty much standard in this market? Did you go back and ask for a reduction knowing seller had the upper hand? Have you backed out even though it meant losing your EM?  How did it work out for those who moved forward? For those who moved forward what did you do to make up for the mistake? When is walking away the lesser of two evils?

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Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
4y

What is your metric for saying you overpaid 25-35k when the house appraised at the value you bought it for? And it seems like you are looking to place blame elsewhere for you buying a house that needs updates when that's not what you wanted. You probably bought this because you didn't want to pay the price for done houses, but you were also desperate to lock one up. If you are past inspections and have no grounds to back out, you will lose your EMD unless you can negotiate out of it. But what is your end game? Back out of this deal and then start all over again, go under contract, and then complain again that you paid too much even though the house appraised? Doesn't make much sense.

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  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    4y

    What is your metric for saying you overpaid 25-35k when the house appraised at the value you bought it for? And it seems like you are looking to place blame elsewhere for you buying a house that needs updates when that's not what you wanted. You probably bought this because you didn't want to pay the price for done houses, but you were also desperate to lock one up. If you are past inspections and have no grounds to back out, you will lose your EMD unless you can negotiate out of it. But what is your end game? Back out of this deal and then start all over again, go under contract, and then complain again that you paid too much even though the house appraised? Doesn't make much sense.

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  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Jonathan Greene

    Is this the Jonathan Greene?!!! Thanks Jonathan no blame for anyone but myself. I think in RE everyone makes a mistake at sime point? When you realize you are about to make a mistake does it make sense to go ahead and ride the wave anyway or back track. And in this market is 10-15% overpayment even a big deal?

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  • Sunny Alexander
    Real Estate Broker · Tampa, FL · Member since 2020 · 103 posts · 74 votes
    4y

    The inventory issue is not going to go away anytime soon.  With just the data you provided, I think if you have a good interest rate and it appraised, then move forward. Do the numbers work with your sales price?  Will it cash flow?  Good luck and keep us posted!

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  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Sunny Alexander

    Thanks Sunny, interest rate is good and it appraised. We are going to house hack it the first year. The only way it has meaningful cashflow is to house hack it, we knew that going in. Otherwise we are looking at only a 2% cash on cash return.

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    It sounds like you underpaid. You bought it for less than the appraisal. The appraisal was done by an “expert”, the listing price was a guess between the realtor and the seller. What if the original list price on the property you bought was $50k higher and you had talked them down $25k? Then did you overpay?  What if he original list price was $100k less? Then did you over pay by $125k?

    I have paid $100k over asking and more than doubled my money with just simple buy and hold. I’ve refused to pay asking price and lost a boatload by not buying. 

    I’ve never lost money on a purchase (even riding vegas through the 2000’s). Time heals almost any problem in real estate pricing. I have on the other hand lost hundreds of thousands not buying. 

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  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    @Adah None Unfortunately yes.

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  • Michael Gessner
    Pomona, NY · Member since 2016 · 375 posts · 217 votes
    4y

    @Adah None before you make a decision and pull the plug, get estimates from contractors for the required updates. Once you know the cost of updating then see if your numbers still work. Once the units are updated then you can charge more in rent.

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    4y

    We need a few missing pieces of the puzzle to help.  Why do you think you overpaid (do you have comparable sales)?  The appraisal would suggest that you are paying market price.  Why does the house have surprise renovations (a quick walk through can assess whether it's move in ready or not)?  If unknown things showed up during inspection, the seller should fix or credit them.

    Regarding your question, I would pick loosing $4k over loosing $35k 10 out of 10 times.  Good luck...we all learn along the path to success.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    4y

    You paid what it cost to acquire the property. Guess what, next year it will probably cost more. The year after more, the year after that even more.

    That's how inflation works. You can either view it as prices rising, or your dollar being devalued each year. Regardless of how you view it the practical application of it is all the same.

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  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Bud Gaffney

    Thanks Bud. You mean yes to “overpaying is standard in this market?”

    0Reply
  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Bill Brandt

    I agree I have lost by not buying at least 9 months ago. That is why I hesitate to pull the plug on this one.

    My estimate of value is simply based on 4 recent sales in same neighborhood. Two in similar condition sold for 25k and 30k less. 1 upgraded one sold for15k more another 30k more. It will cost a lot more than 30k to upgrade to similar upgraded ones.

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  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    @Adah None the market price by definition is what a buyer and seller agree to. If it was a competitive situation you have to do what you have to do in order to win a deal.

    Overpaying is a relative term that can be defined using different metrics. If the market goes up another 15% did you overpay?

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  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Michael Gessner

    Thanks Michael, it will not cash flow without house hacking. If prices continue to rise perhaps after 3 years. Yes, I knew going in it would not cash flow without house hacking.

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  • Charles Kao
    Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
    4y

    @Adah None

    Overpaying is relative as the market is appreciating rapidly as people

    have access to cheap money and cost of everything has skyrocketed to go with increasing wages. If you think prices are high now imagine what inflation will do to real estate prices in the coming years.

    1Reply
  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Matthew Irish-Jones

    I would say if the market went up 15% over the next year or 2 I would be glad I bought it. But no one knows tomorrow, hence we buy for what it is worth today?

    0Reply
  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Mike Dymski

    No surprise renovations, my estimate assumes the current condition and value is based on houses in similar condition.

    0Reply
  • Adah N.
    OP
    Investor · Atlanta, GA · Member since 2020 · 294 posts · 142 votes
    4y

    @Mike Dymski

    Is paying 35k more than a house is worth in this market the same as losing 35k?

    I am thinking the reason most people may overpay is the trajectory the market has gone the past 2 years? It appears each time you pass up on a house, the next one in similar condition will likely go up for a little more than the last?

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    4y

    Everywhere any investor looks it seems like people are overpaying for houses. You should see my dad at the fish market when they tell him the price of grouper. He just stands there with his mouth on the floor saying "GAAAAHHH". Makes me laugh every time because he grew up in Florida skipping school to go fishing. Price is relative. I think you are just getting a case of buyers remorse and you haven't even closed. Keep moving forward and grow into the property. Or if you are really concerned just back out and lose your earnest money. That is what it is there for. But in a couple of years when you move on to the next property and this one is rented you won't think twice about it. I would also be a little skeptical about upgrades. For primary homes upgrades can be nice but for rental sometimes not so much. I agree with @Sunny Alexander, our inventory problem is not going any where any time soon. 

    2Reply
  • Nate Marshall
    Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 736 votes
    4y

    Funds like Black Rock don't care about the price today or the income. They are betting on a 25-30% if not higher increase in values over the next 5 years. 

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    4y

    Honestly, have you completed your inspection contingency? If not then use that to get out of the contract.  It sounds like you are unhappy and renovations are always more than expected....  and right now it is really hard to get good contractors and you will need to wait to get the work done. 

    If so many houses have sold recently maybe wait and buy something else.....?    

    0Reply
  • Andrew Bosworth
    Rental Property Investor · Harrisburg, PA · Member since 2013 · 161 posts · 62 votes
    4y

    @Adah N.

    Is this an investment property or primary residence for you?

    If an investment, view it that way.  It's easy to look at the numbers today and become overwhelmed.  As others have already mentioned, the property is likely to appreciate (at different rates depending on the market you're in, etc.), but also keep in mind that rents will increase, there are tax benefits and debt paydown.  Yes, you might have to put some extra money in today for repairs, but this will only add to the value of the property and what you can charge for rent.  If the numbers on this property work today, they'll likely continue to work moving forward - given you manage well.  What might look like an average investment today, could become a great investment in the future.

    It's easy to become overwhelmed right now, especially in what appears to be a crazy RE market, but keep asking questions, learning and moving forward.  You'll do great!

    0Reply
  • Luciano A.
    Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
    4y

    @Adah N.

    The question I would ask the appraiser is if you were to put X amount of dollars into the property and have it turnkey would he have appraised it for higher. IF he says yes, there are comps that support higher values in your area then you really are not overpaying. You are paying what it's worth at that point in time. If you can add value and make the place look nicer and get it appraised for more than what you put into it then are you really paying more? I see people overpaying for a property because they are in FOMO (Fear Of Missing Out) and after rehab, they have a nice investment property that appraises for exactly what they have in it. Now that is what I would say was overpaying for a property. But if your rehab and purchase price is under the new appraised value then you have been rewarded for your time, money, risk. 

    Another thing in this market is the appraisers are usually conservative to a fault because they do not want to get into trouble so most are appraising close to or at sales price. The good old days of having things comps well above sales price are few and far in between. 

    Best of Luck 

    0Reply
  • Rob Lee
    Real Estate Broker · Dallas, TX · Member since 2016 · 248 posts · 240 votes
    4y

    When a property is listed for sale, the price should be based on area comps. Before a buyer makes an offer the agent should share recent comps. The offer should be made based on said comps and whatever analysis you choose to do as the buyer. The appraisal is also based on comparable homes sold. In the end, the market determines the price. 

    Did you make an offer without seeing the property? Have you evaluated alternative properties in your desired area? Do you have any reason to believe that you should have gotten a better deal? What do your numbers say? Did you waive your inspection? Upgrades are not a requirement. Unless you gave up everything in order to win the deal if you got an inspection you can request that repairs be added to an amended contract. Good luck.

    Rob

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  • Jennifer Jo McCallonBusiness Member
    Member since 2020 · 62 posts · 59 votes
    4y

    If everyone is overpaying then nobody is overpaying. Also, the nearby comparable may have issues you are unaware of, like foundation problems, dry rot, or might look good but need new windows or HVAC. There also may have been seller credits. Backing out and losing $4k, spending more time looking when you think you overpaid by 10% (which is $4k based on your purchase price) is probably not a great idea. 

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  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    Overpaying is not the correct term to use.

    Over asking....

    Completely normal in every market across the country this year. 

    This year, in Nashville if you offered the asking price on a property you go straight to the bottom of the stack. 

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