When is it “ok”to overpay for a property ?

Rental Property Investor · Member since 2020 · 11 posts · 3 votes

Today’s market is crazy!! And sometimes just to Not lose a “good” deal we offer a little more or too much. But is it ok? Is yes when and why? If not, why?

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Dan Maciejewski

Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes

As @Joe Villeneuve said above, you have to define "overpay."

Some people think overpaying is paying more than someone else is willing to pay. You can't buy anything others want to buy if that's your opinion, so in that context, you have to 'overpay.'

Some people think overpaying means paying more than asking price. I have heard people say, "I would never pay more than asking price." The real estate market is not a retail store. Asking price is an invitation to negotiate, not shelf price on a can pf peas.

Some people think paying more than appraised value is overpaying. An appraisal is a tool used by banks to give them some sort of assurance that they are not overextended. It's definitely not a determination of value. I can talk about appraisals but this may not be the thread.

All of the above examples are times where it might be okay to "overpay."

A time it is not okay to overpay is when the numbers don't work for you. Whatever your metrics and numbers are, you have to buy within that box. You can never break your metrics to force a deal to work. There are like 37 measures to judge an investment on, so not all investors will have the same needs, but whatever your metrics are, you have to make sure that the purchase fits.

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Jon KellyPro Member
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
4y
If you overpay then it's no longer a deal... therefore you shouldn't buy it.
A better question is: should you adjust your assumptions to reflect current market conditions?
6 Reply
Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
4y
It is never ok to overpay for a property.
In this market, you do need to pay more than 6 months ago. You need to pay more than than 3 months ago. And you need to be more speculative than you used to be. But you should never overpay. Even in a red hot market where there is a bidding war on every deal you pursue, you still make money n the buy.
You need to study the direction of the market, the sold comps, the for sale comps, the "under contract" comps, select the right location, and have a back up plan in the event things don't go your way. Then make a very calculated, educated, offer.
7 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
It depends. First, define overpay. There are many definitions that could apply here. I have paid more than an asking price, but the PV was still higher than what I paid. That's not overpaying due to the definition of what the words "paid for" mean. We have to also define what the definition of what "paid for " means too.
What the price is for an accepted offer, and what the REI is actually paying for the property, should never be equal. What a REI pays for a property should ALWAYS be less than what the final accepted offer price is. That's because the buyer/REI cost, as in what they are actually paying for the property, is only the cash that comes out of pocket. The rest of the accepted offer price, plus interest, is paid for by the tenant from the rent money ...as long as there is positive CF. This is a big reason why I'll never buy a property that has negative CF. I would be the one coming up the negative CF amount, in cash, out of pocket. This means that as the negative CF accumulates, that accumulated number adds to the cost of the property to the REI.
6 Reply
Eric Gerakos
Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
4y
For me, never.
1 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
The only time I would 'overpay' for a property would be if I was POSITIVELY CERTAIN that the appreciation was going to be so overwhelming that it would be a moot point in a few years.
The type of appreciation I'm talking about would be, for instance, doubling the value in 2-3 years. I've had that happen a several times and it makes the pain of 'overpaying' by $20k go away real quick.....
3 Reply
Allicyn Aubut
Rental Property Investor · Duxbury, MA · Member since 2018 · 17 posts · 12 votes
4y
I like Joe's comment on the definition of "over paying". To me, if you pay more than asking and more than other comps in the area sold for a few months ago, but the deal still cash flows, and this is one of your first deals = that is ok! As long as you plan to hold for a long time. Get in, get going and start learning. Once you have a few properties, your goals can change a bit and you might look for higher returns or better deals etc.
2 Reply
Julie Wright
Member since 2021 · 5 posts · 3 votes
4y
In one of the episodes I recently listened to, David mentioned that overpaying by a few thousand is insignificant when compared with the idea that the asset appreciates over time AND (assuming you've leveraged it)-- money is "cheaper" than it will be in 10-15-20 years. So being able to borrow $5-10k more right now at a lower interest rate, before more inflation is actually a positive.

There is a point where overpaying is not worth it. You'll have to do the math for your situation.
Additionally, assuming you were intending to buy and hold-- can you afford to keep the property if it doesn't cash flow/only breaks even?
2 Reply
Zachary Inman
Specialist · Indianapolis, IN · Member since 2021 · 312 posts · 282 votes
4y
"Overpaying" is entirely relative. With the Bull market real estate has been experiencing for the next decade, everyone always thinks they're overpaying because the prices continue to appreciate.
I think the actual NOI and downside risk factors are far more vital to underwriting than anyone's gut feelings about overpaying or underpaying.
4 Reply
Rendy Richiez
OP
Rental Property Investor · Member since 2020 · 11 posts · 3 votes
4y
@Julie Wright awesome reply thank you very much!!
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Allicyn Aubut:

I like Joe's comment on the definition of "over paying". To me, if you pay more than asking and more than other comps in the area sold for a few months ago, but the deal still cash flows, and this is one of your first deals = that is ok! As long as you plan to hold for a long time. Get in, get going and start learning. Once you have a few properties, your goals can change a bit and you might look for higher returns or better deals etc.
1 - I would pay more than the asking price, but never more than the comps in the area.
2 - ...and whether it was someone's 1st, last or middle deal...makes no difference. Why would it?
3 - I would never hold any property a long time because the value of that property starts to exponentially lose money once you have recovered your cost (cash in) and your "paid for equity" ( the DP) equals the appreciated equity (in other words, doubles).
4 - I would never give a "pass" on a losing deal just because it's someone's first (or 2nd,...or any number for that matter). Again, why? Does that person lose less money if it's their 1st? Actually they lose more since they have less money than when they started, and now have to buy their seed money back. It was free when they started...now it's gone bye-bye. The first of Two Golden Rules is to NEVER spend your seed money. Use it to infinity, but never, EVER, spend it.
3 Reply
Dan Maciejewski
Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
4y
As @Joe Villeneuve said above, you have to define "overpay."
Some people think overpaying is paying more than someone else is willing to pay. You can't buy anything others want to buy if that's your opinion, so in that context, you have to 'overpay.'
Some people think overpaying means paying more than asking price. I have heard people say, "I would never pay more than asking price." The real estate market is not a retail store. Asking price is an invitation to negotiate, not shelf price on a can pf peas.
Some people think paying more than appraised value is overpaying. An appraisal is a tool used by banks to give them some sort of assurance that they are not overextended. It's definitely not a determination of value. I can talk about appraisals but this may not be the thread.
All of the above examples are times where it might be okay to "overpay."
A time it is not okay to overpay is when the numbers don't work for you. Whatever your metrics and numbers are, you have to buy within that box. You can never break your metrics to force a deal to work. There are like 37 measures to judge an investment on, so not all investors will have the same needs, but whatever your metrics are, you have to make sure that the purchase fits.
9 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Julie Wright:

In one of the episodes I recently listened to, David mentioned that overpaying by a few thousand is insignificant when compared with the idea that the asset appreciates over time AND (assuming you've leveraged it)-- money is "cheaper" than it will be in 10-15-20 years. So being able to borrow $5-10k more right now at a lower interest rate, before more inflation is actually a positive.

There is a point where overpaying is not worth it. You'll have to do the math for your situation.
Additionally, assuming you were intending to buy and hold-- can you afford to keep the property if it doesn't cash flow/only breaks even?
1 - This is an expensive rationalization.
2 - The math always wins...always. REI is nothing more than a math problem with $$$$ in front.
3 - No such thing as breaking even. Minimal CF is negative CF waiting to happen...and there is nothing good about a property with negative CF. That negative CF comes out of the REI's pocket, which means it adds to the cost to the REI. The only cost to the REI is what comes out of their pocket, so why accept added cost?
Equity doesn't make it better since equity doesn't actually exist until you can tap into it. Until then, it's the same as having to keep $5k in your checking account in order to get free checks. The checks aren't free, they cost you $5k upfront. In this case, the equity is your cost for the property...it's your cash locked in jail. It's value is what it can buy in the form of Property Value. So, if you have $20k in equity and the property is worth $100k, the equity is buying you 5 times its face value. When that property appreciates $20k, the equity is now $40k and the PV is now $120k. Sounds good, until you do the math. That $40k in equity is now only worth 3 times its face value, and as the property appreciates more, that equity's value decreases even more.
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Dan Maciejewski:

As @Joe Villeneuve said above, you have to define "overpay."
Some people think overpaying is paying more than someone else is willing to pay. You can't buy anything others want to buy if that's your opinion, so in that context, you have to 'overpay.'
Some people think overpaying means paying more than asking price. I have heard people say, "I would never pay more than asking price." The real estate market is not a retail store. Asking price is an invitation to negotiate, not shelf price on a can pf peas.
Some people think paying more than appraised value is overpaying. An appraisal is a tool used by banks to give them some sort of assurance that they are not overextended. It's definitely not a determination of value. I can talk about appraisals but this may not be the thread.
All of the above examples are times where it might be okay to "overpay."
A time it is not okay to overpay is when the numbers don't work for you. Whatever your metrics and numbers are, you have to buy within that box. You can never break your metrics to force a deal to work. There are like 37 measures to judge an investment on, so not all investors will have the same needs, but whatever your metrics are, you have to make sure that the purchase fits.
Bingo!!!!
1 Reply
Daniel SmythPro Member
Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
4y
@Rendy Richiez
When you absolutely, positively, need it so bad you can taste it!
But that's emotional buying, unless it fits in with a larger plan..
[email protected]
0 Reply
Daniel SmythPro Member
Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
4y
@Rendy Richiez
When you absolutely, positively, need it so bad you can taste it!
But that's emotional buying, unless it fits in with a larger plan..
[email protected]
1 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
4y
There's no real way to know if you have overpaid except in the rear view mirror, anyway. There's a market I was trying to buy a house in 2 years ago and I thought everyone was overpaying for the properties. Well, I was wrong, because those people have made a hell of a return in those two years.
Podcast Guest on Show #243
Skyline Properties
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5 Reply
Jonathan Roberts
Rental Property Investor · Indian Orchard, MA · Member since 2021 · 7 posts · 1 vote
4y
@Rendy Richie in my opinion, there can never be a price too high if the asset produces more income than it costs.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Jonathan Roberts:

@Rendy Richie in my opinion, there can never be a price too high if the asset produces more income than it costs.
That's about as contradictory a statement as I've seen in a while.
0 Reply
Michael Deering
Rental Property Investor · Lehigh Valley, PA · Member since 2017 · 200 posts · 191 votes
4y
Why would you overpay?
0 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
4y
"Overpaying" is not a price or market problem. It's a deal flow problem. Active investors with robust deal flow are agnostic to the property and price...they have tons of properties flowing through the funnel and make lots of offers at their target price. Some close, some don't...and they simply and unemotionally stick to their criteria. We feel we have to pay up when we don't have enough deal flow.
4 Reply
Jill F.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
4y
If it doesn't cash flow to our requirements then we pass. My personal bottom line number in my market is $100/month/unit at purchase with no more than 25% down at whatever interest rate I can get from my portfolio lender AND quick rent upside of at lease $50/month/unit with below market tenants and/or cosmetic updates. I live off my cash flow so I *really* care about cash flow. At first, we bought properties at the lowest entry level price point to conserve our seed capital, but then once we found and bought a more expensive property that was a good cashflow deal, we found that the appreciation combined with cash flow made higher priced units a better deal because we were able to use the equity in those properties to buy other properties bringing very little cash to the table. Since 5+ multi-family appraisal values are based on NOI, cash flow is king. I guess if you have decided to gamble strictly on appreciation on a single fam, small multi, or other type of property, then you might 'overpay' if you think the property will appreciate in a time frame you find acceptable. I had a friend whose parents held onto a piece of vacant land zoned for commercial use for 20 years. they finally did get a big 1mil+ payday-- a Carrabas was built on the property.
2 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
I will take appreciation over cash flow myself. But I kinda fell into a niche of finding very distressed houses in areas that I guessed (correctly) were about to gentrify....a double whammy...
My expectations became (and still are) to double my money in less than 5 years, usually 2-3 yrs.
3 Reply
Reggie Powell
Realtor · Woodland, CA · Member since 2020 · 33 posts · 43 votes
4y
@Rendy Richiez
Overpaying is never a good move!
You need to know your numbers. Decide what you need to make on a deal before you buy it and stick to that. What a deal is to you might not be to someone else. And vice versa. There are many ways to win in real estate. As long as you stick to your numbers, you will never overpay.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Bruce Woodruff:

I will take appreciation over cash flow myself. But I kinda fell into a niche of finding very distressed houses in areas that I guessed (correctly) were about to gentrify....a double whammy...
My expectations became (and still are) to double my money in less than 5 years, usually 2-3 yrs.
Then you'd be losing money two ways. Negative CF and your increased equity from appreciation...unless you'd be selling at that 5 year mark. Then you'd just be losing money one way (NCF) and would have to pay yourself back that negative from the proceeds of the sale.
0 Reply
Dan Rowley
Investor · Cary, NC · Member since 2012 · 218 posts · 196 votes
4y
DO: just stick with your #s/projections and that will dictate the proper price.
DON'T: make it emotional or about FOMO, which is prevelant these days given how heated the market is and so many bids on decent properties.
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