I've seen this comment floated around a few times, especially when I was in the market to purchase my first investment property. I've seen it thereafter and I'm curious what is the logic behind it? In my mind, if I want to pay $200K for a property, but it's listed for $225K then it's in my best interest to negotiate the price down to the price that I'm willing to pay, correct......because if I don't, then I will need a larger down payment, pay higher closing costs, it will reduce my cash flow and it will take longer to pay off the loan. Is there something else that I'm not considering where paying a higher cost may be in my best interest?
Your story is:
They want $225k I negotiate them down to $200k and save cash, downpayment, closing costs, etc....
Let me tell you the other side of that story.
Between 2008 and 2010 I bought about a dozen properties in vegas between $107 and $150k. On those properties I pretty much paid asking. I DIDN’T buy about another dozen properties because the seller was asking $5-$20k more than identical properties I had purchased within the last few months. I guess you could say I saved by not over paying $120k for those 12 properties. Or you could say they are all worth over $300k a piece and I lost $2.5 million by not overpaying.
My point is, what if while haggling for that $225k property @ $200k someone else buys it. You try a few more times and now with an average appreciation of 8-10% per year similar properties are asking $250k. Now are you going to try to haggle them down to the $225k you could paid last year? Because you’re definitely not going to get them down to $200k. Does your pride prevent you from paying $250k until 2023 when they’re asking $275k?
We don’t even talk about the $20k/year In rent you miss out on.
With all my mistakes I bring in a little over $200k in rent and keep about $140k in profit. But the appreciation is closer to $250k/year. While I didn’t count that as I don’t plan to sell, at least not more than 1 every few years as I move in to them to save taxes. I certainly think about the houses I didn’t buy almost as much as the success I’ve had. All to save $10k here or $20k there.
After 5-10 years you don’t even remember what you paid for the properties, because it just doesn’t matter. Honestly I like to think I “paid” my downpayment. Since the rest of the money came from the tenant.
It isn't about the Purchase Price of the Property. It's about the cost to you, the cash flow, and the potential appreciation (free cash, locked up for safe keeping in the building equity) on that purchase.
Like @Bill Brandt just said. Your cost is restricted to your DP...basically, anything that comes out of your pocket is your cost. The tenant pays the rest since they are the source of funds that is paying the rest. I've paid more than an AP on properties and made more money at the time of closing than someone else that could have paid a lower AP for that same property. It's all about what comes out of pocket, and the terms.
It is about the numbers, but you don't want to overpay either. What you can afford to pay doesn't determine the market value or the sales price. How much is the house worth? If you pay a bit over market (eg $2K on a $200K house), not a big deal in the grand scheme of things. Still where you make your money is when you buy, so buy smart.
The header for this thread is bad advice. You should always consider all the factors, including purchase price. Yes, the market can be very forgiving, but that doesn't mean you throw caution to the wind.
Bill provides a good example, but take it with a grain of salt. He bought at the bottom of the market when house prices had gone so low that you could probably pay double and still be ahead today. But that's speculation in a very unique situation. I bought a new house in Vegas for $130,000 in 2000, sold it for $265,000 in 2005 and five years later it sold for $82,000. It didn't get back to the 2005 price until 2018. It's worked out for Bill, but only because his timing was fortunate. I guarantee he would look at the prices a little more closely now because he knows the market is just as likely to tank as it is to continue growing.
I was going to post this when I saw the often repeated “you make your money when you buy” quoted above. I’ve never really liked that quote. Because you don’t make any money when you buy. As Nathan’s example shows. You either make your money from rental income or You make your money when you sell, not when you buy.
In his example it didn’t matter if he talked the guy down from $130k or not, he made money when he sold for $265k. On the other hand. It didn’t matter if his buyer talked the him down to $250k from $265k or not when he sold for $82k he lost. He should have sold sooner or later. (In the 11 years since his sale it’s probably quadrupled in value. In the meanwhile his rental income vs value would have been insane. Ask the guy that bought it.)
If something is already a good value and below comps, I'll offer the list price. I'm not going to risk losing out on a good deal.
But if I've determined that a property isn't worth my spending more than $200K on it, then I'm not going to spend more or much more than that.
I have twice made offers substantially less than the list price. Those were situations where a substantial rehab was needed and their list price was way off, once that was taken into consideration. I would also include a brief summary with repairs needed an approximate cost. The first time, the seller was insulted and wouldn't even counter. They passed along through their agent it was "too low". They started dropping the price every month. 6 months later, the list price was only $8K more then what I had originally offered them. But I was on to better things.
The next one, I was under contract for two duplexes from the same seller. I'd already considered in my offer about $10K-$12K/unit for major cosmetic upgrades and deferred maintenance issues. But my inspection uncovered a lot more ugliness. I countered for substantially less than my offer with explanations. The deal fell through. Only for me to pick it up again 3 months later when the list price for each one dropped pretty close to what my counter offer had been. This time it worked out and I closed on them.
In the current market, there's not a lot to be negotiated. You'll likely be paying over list and over appraisal if you actually want to get something. So then you are really just calculating if the numbers still make sense in that scenario.
@Bill Brandt you provide great insight, I should've clarified, I'm talking more in terms of what's happening in today's market. I hear so much about that when purchasing a fix and flip you want to get it at a price point 70-75% below market, so I'm trying to understand why is it that you wouldn't want to get a deal on a buy and hold? For me, if I'm buying a property as a buy and hold and I determine that I can't cash flow or something happens and I need to sell it quickly wouldn't it be in my best interest not to have paid over for it?
Regarding your comment about not remembering what I paid for a property after 5-10 years, I work in finance and I remember how much I paid for my 2nd car 15+ years ago so I'm willing to bet that if I didn't get a good deal on a property I would remember it.
@Theresa Harris , can you explain your comment about how when I make my money is when I buy?
Sure. Of course you’d like to pay 70-75% of what a property is worth. But flip that to you as the seller. Why would you sell for 70-75% of what your property is worth?
You can get 100-120% in less than 60 days. With a traditional mls listing. You can get 85-90% in 3-6 days from Zillow opendoor or offerpad plus who knows else. Plus they’ll let you stay 30-60 days rent free while you make plans.
I’m sure 1 in 1,000 (or maybe less) properties exchange hands at deeply discounted prices. People willing to call owners losing their homes to foreclosure or had their patents die, or their spouse cheat on them or die. Other’s desperation is their opportunity. But those buyers very hardworking and skilled. They”re earning that discount, it’s their “job”.
99.9% of us have other jobs. Lack the skills or find it too socially awkward.
think about it. If 70% deals were common you could tell those people you’ll buy all their deals at 80%. Win win.
Originally posted by @Frankie B. :
@Theresa Harris, can you explain your comment about how when I make my money is when I buy?
You have no control over the price when you sell as that depends on when you sell, how much it is worth and what someone is willing to pay for it. When you buy, you are mostly in the driver's seat and if you don't like the numbers, you can buy another place.
My last 2 purchases didnt pencil out when I bought them , they were close .I paid about 20K more than I wanted to . Now 4 years later the numbers are great .
There are more buyers than sellers , and the sellers know it . Deals ane few and far between .
I had 2 vacancies this spring , tenants bought houses . I had the units filled in less than 2 weeks , just by word of mouth . The tenants told friends and I had 3 to 4 couples wanting each unit . ( with a rent increase of course )
@Frankie B. The market could go up or it could down . The market will go up , and it will go down . You just dont know when . You dont lose money or make money until you sell .
Its all a gamble , its investing , sometimes you win sometimes you dont . Fun isnt it ?