Buying with Cash and Ignoring ARV

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I don’t ever remember a time when so many investment properties were being purchased with cash. With today’s unbelievable real estate prices, many investors are simply forgoing traditional financing as well as hard money financing in favor of cash purchases. In fact, many investors are simply converting their retirement accounts to self-directed accounts and paying cash for investment properties through their IRAs, 401Ks, etc.

One of the reasons cash purchases have become the norm for many investors is because the price-point of many investment properties doesn’t warrant the headache of trying to get financing. Many investors would rather shell out 40K for an acquisition and rehab and let their money earn a solid return – typically much higher than in a traditional investment vehicle like stocks, bonds, etc.

However, I think there are a number of investors who probably prefer to get financing for an inexpensive property, but some of the constraints associated with conventional financing make it too difficult. As crazy as it sounds, many of these properties, selling for less than a third of what they sold for just a few years ago, can’t get financed in the current environment.  Sometimes it’s the fact that appraisals are just so bad as a result of heavy foreclosure activity.  Other times it’s because lenders aren’t willing to lend under a certain price threshold.  Whatever the case, lower priced investment properties just aren’t great candidates for financing right now and investors have responded by buying with cash in record numbers.

Interestingly, with all of the buying activity that is taking place, investors are paying less and less attention to ARV (after repaired value).  It’s interesting to me because it’s been pounded into our heads for so many years that a property purchased and rehabbed well below market value was the primary distinction of a good real estate investment.  Now, with prices and comparables in the toilet, investors care more about the kind of cashflow that a property will produce and less about the amount of equity (if any) a property may have.  Understandably, if a property can be purchased and renovated for 40% of what it would cost to build new while also producing double digit yearly yields … does it really matter if you’re buying at market value? For a cash buyer that doesn’t have to worry about an appraisal, it probably doesn’t. The cash buyer is probably more interested in cashflow and any equity that develops as a result of recovering prices is icing on the cake.

I think most investors realize that the opportunity to buy at these insanely low prices will not last forever. Prices will recover at some point – it’s simply not possible to maintain values in markets that are adding jobs and people.  For investors that have cash sitting in bank accounts earning less than 1%, don’t get scared away by depressed prices. The opportunity to put that cash to work in this real estate market is unprecedented.

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

8 Comments

  1. Hi Ken, for the last few years I been paying all cash and get a LOT better deals than one can with financing and close within two weeks. Since I can build a house from the ground up, I’m not too worried about having an inspection or appraiseal done. After rehabbing, the property is usally worth double and a pretty healthy cash flow.

    • Mike McKinzie on

      Another reason for paying all cash is that you can then become the bank when you sell it. With financing being tight for most buyers, being able to carry the paper on a property opens the door to a lot more buyers for your property. You buy for $40,000, put $20,000 repairs in it, sell it for $100,000 with the buyer putting $10,000 down and you carry the $90,000 First Trust Deed at 5% or 6% or even 7%, and your return is quite healthy.

  2. We find the same thing to be true here in Japan. The high volume of available affordable, high-cashflow properties that need zero work (turn-key for as low as $20K and yielding as high as 16-17% p/a in rent alone) means financing is not necessary, a burdain really.

      • Kyushu (primarily Fukuoka, Ooita and Nagasaki), Shikoku and occasionally Okinawa are where we find most of ours. Definitely nowhere near Tokyo, Osaka, Kyoto or Hokkaido :)) The main challenge is that, where the deals are, there are hardly any English speakers, and they aren’t very used to dealing with foreigners, barring Chinese and Koreans occasionally, so you need some savvy local contacts.

  3. Good points, Ken! Remember though, there are 3 aspects to value…..cost, comparable and INCOME! You are getting a good ARV by the income that the property generates! Show a history of this income and your ARV for a potential sale will reflect that value down the road. Or like you say, just hold for the long term and enjoy the cash flow.
    Bill

  4. Good article. We’re seeing a lot of people buying 4 and 5 properties at a time here in Metro Detroit. In many Detroit suburbs, you’re able to buy a 3/2 brick ranch for $35,000 that will generate $900-$1,000 per month in rents. Everyone’s paying cash.

    One early issue that I see right now is there are a lot of people looking to get in on the hot rental market around here and are not doing their DD. There’s someone at every turn willing to sell you a $5,000 property for $45,000+. The properties are worthless and there are a lot of people getting scammed right now. Buyer beware in Detroit!

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