When is it Acceptable to Purchase a Property For Market Price?

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When is it Acceptable to Purchase a Property For Market Price?

Qusay F.
Buffalo, NY · Member since 2015 · 13 posts · 1 vote

Hello all,

About 6 months ago I purchased my first property, a duplex on the MLS at below asking price (and below market based on comps) in a high-demand, albeit up-and-coming neighborhood of Buffalo, NY. I've since rehabbed it and just about ready to list it for rent. The rehab has been exhausting, but a great learning experience. I work a full-time job so I want to find something more "turn-key" for my next investment purchase. I made an offer on a similar home, but in a higher-class area. Again, I found the property on the MLS, made an offer, had an inspection, etc. My realtor thinks I got a great deal, even though I went against my ideals this time and offered above asking price and I feel I may have made an emotional decision with the offer. The owner declined negotiating the inspection addendum and I have an out, but I think there is good long-term opportunity here according to my calcs - good cash flow + appreciation + stable rental market.

To sum it up, my question is: in your opinion(s), when is it acceptable to purchase an investment property in a hot rental market at asking (or above). what would you compromise on with initial up-front cost (i.e. no rehab, appreciation prospects, etc.)?

Thanks

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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Qusay F. The definition of overpayment is always relative. Ask anyone if they "overpaid" in San Francisco 5 years ago, or Seattle, or even Austin for that matter. Even if the answer was a begrudging "yes" then I bet they are happy they did. That optimism aside, I would say that if you THINK you're emotionally attached then you've lost some degree of objectivity. Either it pencils or it doesn't, either it meets your hurdle rate or it doesn't. If you're flexing your pre-established parameters it might not end well. Falling in love with a property or having self-induced pressure to close a (any) deal can be destructive. My advice: start with a blank sheet of paper and rerun your numbers again. Based on your desired threshold for a return (likely cap rate) how much do your numbers say you should pay for the property? If it's over asking, who cares? Paying 50% under asking for an overpriced property is no more or less of a deal than paying 100% over asking for an underpriced property. Use your numbers, create your fair value, and offer less.
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  • Denice S.
    Specialist · Buffalo, N · Member since 2013 · 59 posts · 46 votes
    9y

    When the property meets your criteria and you're in a multiple offer situation, it's okay to offer above asking...as long as you're not overpaying.

    1Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Qusay F. The definition of overpayment is always relative. Ask anyone if they "overpaid" in San Francisco 5 years ago, or Seattle, or even Austin for that matter. Even if the answer was a begrudging "yes" then I bet they are happy they did. That optimism aside, I would say that if you THINK you're emotionally attached then you've lost some degree of objectivity. Either it pencils or it doesn't, either it meets your hurdle rate or it doesn't. If you're flexing your pre-established parameters it might not end well. Falling in love with a property or having self-induced pressure to close a (any) deal can be destructive. My advice: start with a blank sheet of paper and rerun your numbers again. Based on your desired threshold for a return (likely cap rate) how much do your numbers say you should pay for the property? If it's over asking, who cares? Paying 50% under asking for an overpriced property is no more or less of a deal than paying 100% over asking for an underpriced property. Use your numbers, create your fair value, and offer less.
    5Reply
  • Adrian Chu
    Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes
    9y

    Asking price is not necessarily an indicator of market price.  Do what it feels makes sense for your financial situation and your outlook for the market.

    2Reply
  • Jeff Keller
    Palo Alto, CA · Member since 2017 · 226 posts · 95 votes
    9y

    @Qusay F. .... as others have said asking price is not necessarily market price. In Silicon Valley the expensive luxury homes almost always sell for less than asking price. The local "mid-range" homes in the cities with top rated schools generally sell over asking price.

    If your calculations are good and account for all issues, asking price isn't all that relevant. If you are in the right place at the right time and prepared to buy, you are the one that can make money.

    1Reply
  • Rodney Sums
    Laveen, AZ · Member since 2016 · 584 posts · 528 votes
    9y

    @Qusay F.

    Just out of curiosity and to clarify the last portion of your message, have you calculated that after all costs and reserves etc. you'd still make positive cash flow from day 1 if you buy it at the price you're offering?  Also, was your realtor able to get any indication why the seller won't negotiate the inspection addendum? (I'm going to assume the seller has or believes they can get offers without inspection contingencies)

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Qusay F.

    This is a business.  You should have a business plan (if you don't.. get one).  Your plan outlines your goals, strategies, and criteria to meet your business model to achieve your goals.  If you are a Buy and Hold investor what is your primary goal?  Cash Flow? Appreciation?  Property accumulation?  No matter what that is what you should base your decision on.  Leave emotion out of it.  Stick to your plan or you might as well change it.  It is your decision.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    Any price you pay is the market price. People who tell themselves they are buying below market are lying to themselves or just simply don't understand what they are talking about. 

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    3Reply
  • Patrick Britton
    Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
    9y

    It is always acceptable if the numbers make sense.  @Adrian Chu Says it perfectly: asking price is not necessarily an indicator of market price.  

    It may be helpful to start off considering your maximum allowable offer and work down from there.  So long as you stick to your guns/rules you should be fine.  But without a specific minimum expected return open yourself up to making purchases emotionally and you will find yourself justifying all sorts of things.

    As well, you state that it is a good long-term opportunity because it has good cash flow plus appreciation plus stable rental market.  What exactly does good cash flow, appreciation and a stable market mean in terms of numbers?  And what constitutes a hot rental market to you?

    1Reply
  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
    9y

    the advantage to buying "below market" is the possibility to refinance all your money out of the property and have an infinite return.  I would rather have one deal like this than 20 turnkey a year.  However, if you want to keep plunking down 25% down payment and the numbers make you happy, go for it.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    @John Leavelle has it. The deal should make sense without even seeing the property - - it's all about the numbers and your investment goals. When you have ALL the right data, you can accurately pencil-in the expenses and get to an NOI to derive the CoC & CapRate. Then & only then IMO, would you visit and get serious about making an offer and inspection. Saves an awful lot of time and effort.

    0Reply
  • Jeff G.
    Investor · West Bend, WI · Member since 2014 · 214 posts · 149 votes
    9y

    If it meets my minimum cash flow requirement that's all I care about.

    My investor buddies think I am crazy to buy at market.  But they all buy junk and fix them up.  That's not my gig.  I like my houses to be as close to move in condition as possible.  

    1Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Jeff G.:

    If it meets my minimum cash flow requirement that's all I care about.

    My investor buddies think I am crazy to buy at market.  But they all buy junk and fix them up.  That's not my gig.  I like my houses to be as close to move in condition as possible.  

    GOOD FOR YOU - - you have made choices for specific reasons and in my book, REI is all about NOI.

    1Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    9y
    Originally posted by @Qusay F.:

    Hello all,

    About 6 months ago I purchased my first property, a duplex on the MLS at below asking price (and below market based on comps) in a high-demand, albeit up-and-coming neighborhood of Buffalo, NY. I've since rehabbed it and just about ready to list it for rent. The rehab has been exhausting, but a great learning experience. I work a full-time job so I want to find something more "turn-key" for my next investment purchase. I made an offer on a similar home, but in a higher-class area. Again, I found the property on the MLS, made an offer, had an inspection, etc. My realtor thinks I got a great deal, even though I went against my ideals this time and offered above asking price and I feel I may have made an emotional decision with the offer. The owner declined negotiating the inspection addendum and I have an out, but I think there is good long-term opportunity here according to my calcs - good cash flow + appreciation + stable rental market.

    To sum it up, my question is: in your opinion(s), when is it acceptable to purchase an investment property in a hot rental market at asking (or above). what would you compromise on with initial up-front cost (i.e. no rehab, appreciation prospects, etc.)?

    Thanks

    Often a Turnkey home will be close to market price. This is because (if it was done by a true Turnkey Provider) Everything should be completed. This means ideally, you should not have an major maintenance issues in the near future. Investing in the hot "up and coming" areas might be a bit more risky because who is to say that area will still be "up and coming" in 6 months. I have seen neighborhoods around the country his brick walls when they were climbing. 

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Qusay F. what @Russell Brazil is trying to say is that market price is technically the price that someone pays for something. For that reason you paid market price when you made the purchase. If the house was worth more or less, it would have sold for more or less.

    What you mean by under market is that you purchased a distressed property, rehabed it and increased the value. 

    As long as you have good cash flow and see good future appreciation, you are fine paying over asking. Asking price can be high or low, so paying more or less doesn't automatically mean you got a good deal.

    I don't buy distressed properties because I don't have time to rehab. Six months of lost rent for my typical property would be $7K plus carrying costs and time spent. I just prefer something that is move-in ready so I can cash flow day one. 

    You may be surprised if you run your numbers on your rehab and calculate all expenses including your time and lost rents. The deal may not be as good as it looked in the beginning.

    1Reply
  • Scott Autenreith
    Investor · Tucson, AZ · Member since 2016 · 40 posts · 31 votes
    9y

    Simple: If the numbers work... Let it work. To be able to have that confidence, its crucial that you understand your market. Know the comps (purchase price, rents, etc). 

    Set a standard for what you're looking for- Ex. Under 100k, 7.5% cap, and/or in a certain area. If a property meets your criteria, then pull the trigger. At that point, if its below, at, or above asking price, then you feel comfortable making an offer. 

    I hope this helps. Good luck with your investments!

    1Reply
  • Qusay F.
    OP
    Buffalo, NY · Member since 2015 · 13 posts · 1 vote
    9y

    Wow...I'm truly grateful for the time everyone took to reply to my question. Each and every response was truly helpful in my decision-making. I decided to go for it. 

    Thank you!

    1Reply
  • Johann Jells
    Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
    9y

    My biggest RE regret is lowballing a $330k 4U brick rowhouse by 5% just when the market was taking off in 2000. It's worth at least 4-5x the asking now. After that we always offered asking, if it was a good deal a little lower it should still be a good deal at asking. The difference in a 5% lowball is marginal in the downpayment and mortgage.

    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    9y

    @Qusay F., I have on at least one occasion offered more than asking on a property and I was glad I did.  I have offered below asking and been unhappy when it was accepted.  The asking price does not dictate how much the property is worth or what it will make you.  No one can give you advice on your deal as we do not know your market or the property.  I agree that you need a way to evaluate the criteria for you to make money.  I have fallen in love with property before, and it is not a great thing.  On the other hand it made we work really hard in order to make a deal work to acquire it.  The jury is out on whether it will be a good or bad investment over the long haul.  It is really hard to make a 100% financed deal make any money.  We will see.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I like to always go in with multiple profitable exit strategies ... plan A and plan B (and sometimes plan D & C), all of which would be profitable or at least break even. That is normally not possible if you pay retail market value, since if you need or choose to sell you will incur ~10% transaction fees ... without a discount, that is a 10% loss. Even if you don't plan to sell, having only one profitable exit strategy is a bad idea IMO ... stuff happens, things go wrong, priorities change, and you could paint yourself into a corner if there is only one exit ... and even if they don't, buying below retail market will help both Plan A and Plan B.

    0Reply
  • Erin Shine
    Investor · Denver, CO · Member since 2017 · 22 posts · 30 votes
    9y
    Originally posted by @Jeff G.:

    If it meets my minimum cash flow requirement that's all I care about.

    My investor buddies think I am crazy to buy at market.  But they all buy junk and fix them up.  That's not my gig.  I like my houses to be as close to move in condition as possible.  

     This. You've got some experience now and Buffalo is now a pretty solid market? If you know your numbers and this cashflows or meets your goals, go for it.

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    I would never pay retail but market price is subjective as the condition of the property could be as-is in shell condition.  The market price for a shell might be a good number to be in at.

    0Reply
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