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?
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.
Rental Property Investor · Member since 2018 · 11 posts · 12 votes
4y
I'd slightly overpay if I was running against the IRS clock on a 1031 exchange and needed to buy something to avoid the 15-20% tax hit on capital gains. Otherwise, I need some extra equity in the deal. The market is so bloated right now, with interest rates already pushing 5% on rental property purchases, I can very reasonably see values soon leveling off or starting to drop as appetite dwindles. So overpaying makes even less sense in most locales.
The value of an investment property consists of two components—market value and residual value. For investors, the market value is based on cash flow, net income, cap rates and stuff. The residual value for an investment property is typically zero. However, if you want to buy grannie’s house and uncle Bob is selling it for market value to cousin Freddie, whom you can’t stand. In this case, the value of the property is worth more than the market value because you are emotionally attached to the house and you want to stick it to cousin Freddie. This emotional value is the residual value. Another example is if you own two adjacent vacant lots. In this case, the values of the three properties together are worth more than the market values of each individual property. The amount “overpaid” for the house is reasonable because of its residual value.
I think in your case, you are placing residual value on a future increase in market value. This is speculation, which is high risk and I personally would not do it.
Flipper/Rehabber · Tallahassee, FL · Member since 2014 · 462 posts · 237 votes
4y
@Rendy Richiez over paying is a relative term. Also if you are finding your deals which are on the market (mls) you will more than likely overpay because the competition is massive and you are bidding against home owners who seem to have lost all reason in this market. I bet if you invest some time you could find a house which is not on the open market. Now without the competition you can get yourself a deal. To go back to the question I think you’ll always overpay if you go through the usual channels. So don’t find your properties there.
Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
4y
@Steve Elling I'm in this boat at the moment. I have a portion of 1031 left over and I need to ID a property in the next 10 days... so I have adjusted my criteria to expand my deal flow. I have lowered my CoC expectations to below 5% in order to use up this left over amount.
As for overpaying, I think it is relative to the investor and their particular situation. Last summer, i paid $40K over appraisal (out of pocket) on a property. Many would frown upon this. However, I saw the potential and value of the property. That property was purchased for $700K, appraised for $660K. I put 30% down plus $40K. It was an 8plex (6 conforming and 2 nonconforming). Its tenants were government program. This program pays for all repairs. It was set to cashflow about $20k at COE. I bit the bullet to get my foot in the door. It now cash flows $40K. It also allow me to place the program in future acquisitions.
So it all depends. Just my .02.
But I do agree that you should always make money on the buy and avoid negative cash flow at the start. There are always more properties put there.
Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
4y
@Rendy Richiez I am late to this discussion, but I think this is an important discussion. Overpay depends on your plan. If you don't plan on raising rents or you don't expect appreciation to be high, then yes, overpay is bad. But multifamily investors have been "overpaying" for a while, but they have a plan to raise rents, cut expenses, or think population growth will increase so rent growth is high. Similarly, you can think about any deal this way. In addition, if you are buying a SFH above market price, while everything else is selling at market price, you are likely overpaying. But if you are literally just overpaying the listing price, then you might be okay as long as you are paying market price and you have a plan.
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.
I never said I had negative cash flow, I just said of the two, I'll take appreciation. Much more $$ to be made in a shorter period of time. And of course I sell when the price reaches double or thereabouts, otherwise there'd be no point....right?
Rental Property Investor · Indian Orchard, MA · Member since 2021 · 7 posts · 1 vote
4y
@Joe Villeneuve what exactly did I contradict? Liabilities are liabilities and assets are assets.
Single family primary homes are not assets unless you own them and rent them out and COC ROI is green.
A 2 family home where you live in half but pays the mortgage costs a lot more for that investment, but it's not too much because the deal circumstances are that you reside in half. COC ROI is about flat but the investment doesn't necessarily cost too much.
A 5 unit building half vacant and COC ROI is flat, that's a property you paid too much for.
A 10 unit complex selling for $2 million but produces $150k/yr and costs $125k/yr would be considered by some "too much" but not if the deal is created to create cash flow.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
I was going to address each of the examples you listed here, but I decided to ask a couple of questions first:
1 - How would you define what the words "cost to the REI" in every deal? (Hint: This answer can be a one word answer) 2 - List the items you think could be examples of "cost to the REI".
Today’s market is crazy!! And sometimes just to Not lose a “good” deal we offer a little more or too much?
Paying too much turns a good deal into a meh or bad deal.
A meh deal with RE's inherent hassles is a bad deal.
I've all but stopped looking. The LA just screwed me out of my last purchase and I spent 3 frustrating hours paying all my property taxes. Who needs it.
With a risk-free benchmark of 9.62% in I bonds, I will first max out my annual allotment of those (which is almost significant if you have entities)
Then buy something that doesn't call me or have me concerned about weather, tenants, toilets, roofs, heating and air or bad mgmt.
There's a lot more to a skinny or bad RE investment than just not optimizing returns.
Today’s market is crazy!! And sometimes just to Not lose a “good” deal we offer a little more or too much?
Paying too much turns a good deal into a meh or bad deal.
A meh deal with RE's inherent hassles is a bad deal.
I've all but stopped looking. The LA just screwed me out of my last purchase and I spent 3 frustrating hours paying all my property taxes. Who needs it.
With a risk-free benchmark of 9.62% in I bonds, I will first max out my annual allotment of those (which is almost significant if you have entities)
Then buy something that doesn't call me or have me concerned about weather, tenants, toilets, roofs, heating and air or bad mgmt.
There's a lot more to a skinny or bad RE investment than just not optimizing returns.
Which is why I've always referred to a weak CF ("mehh") deal as negative CF waiting to happen.
Which is why I've always referred to a weak CF ("mehh") deal as negative CF waiting to happen.
I very much agree, although CF isn't always the goal. Sometimes we can buy for the instant equity and control if the waterfall is specific, measured and not too far out. But definitely. Skinny CF from an investment whose purpose is CF is just a turnover, bad tenant, repair or mismanagement away from costing the REI and negating it's purpose.
Which is why I've always referred to a weak CF ("mehh") deal as negative CF waiting to happen.
I very much agree, although CF isn't always the goal. Sometimes we can buy for the instant equity and control if the waterfall is specific, measured and not too far out. But definitely. Skinny CF from an investment whose purpose is CF is just a turnover, bad tenant, repair or mismanagement away from costing the REI and negating it's purpose.
Unless you plan on selling soon (a few years out) the property to access that equity, I wouldn't look at a property that has negative (or mehh) CF. Negative CF just adds to my cost, and that cash that comes out of my pocket to cover that NCF could should be used better in an investment that IS making positive CF. I look at NCF as an exponential loss based on the actual value of that NCF. Most look at the value (-) of NCF as the face value of that NCF. I look at it as the buying power of it...as in using it as a 20% DP. This means the NCF is really a loss of 5 times it's face value.
Thus, the face value of NCF isn't just subtracted from the equity potential (not realized yet), which IS only worth its face value. It's worth more than the equity...5 times more.
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
4y
I FEEL like I have overpaid for at least 75% of the properties I have ever bought in the last 15 years. At least it felt this way when I bought them. In hindsight I am glad I did. When did I ever think - wow, this is a great price!? Most deals are pushing the limit of the buyer, and sometimes also for the seller.
How you FEEL doesn't really matter - analytics matter. And there is a lot more that goes into the consideration than $100 min cash flow. For example, if roof+windows+siding are toast there is no way I am okay with $100 cash flow - expecting 40k in work.
When you look back after 10 years, it does not really matter what you paid for, exactly. The important thing is that you bought it.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
The biggest mistake a lot of REI make when they analyze a deal is to not realize what the difference is between the total cost of the property and the cost of the deal to the REI. They are not the same. When they are, that's when you've paid too much for the property.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
As others said, the term over pay is very subjective. Some consider paying above asking price as over paying, that that assumes asking price was fair in the first place. I have paid over asking price and gotten amazing deals. Some deals I wouldn't touch for 20% under asking price.
It really comes down to the numbers, specifically cash flow and future appreciation. There could also be other factors that may cause you to overpay. Maybe it is your first deal and you are house hacking. It may be worth paying a few extra dollars, since there is a personal benefit. Another reason to overpay may relate to taxes. Maybe you have a large portfolio and are looking for acquisitions to reduce tax burden. You may pay a premium to get acquire a nice asset, understanding it has overall benefits to your portfolio.
Most importantly, figure out if you really are over paying. I passed on countless deals over the last few years saying "who would pay that much". Today I would do any one of those deals that those prices, so I lacked the ability to predict future appreciation. I keep that in mind today when looking at deals, so I don't have the same regret in five years.
Rental Property Investor · Springdale, AR · Member since 2019 · 28 posts · 7 votes
4y
IMHO it is never okay to buy a property that doesn't at least have positive cash flow on day one. If you can't find a property that meets at least that criteria, I'd invest in a balanced liquid portfolio and only buy real estate if/when I can find a deal that can be expected to return at minimum what my liquid portfolio can be expected to return.