I just wanted to do a quick post on the importance of paying the right price when you purchase a property.

Here is an example. I am bidding on a smaller multi-family apartment complex of about 15 units. The current owner had bought the property for about $730K, four years prior. Maybe he put $20K or $30K into it. He was now trying to sell in the mid-$900K range. Based on the cash flow, the property is currently worth in the mid-$800K range, about $75k off from his asking price.

Based on the current real estate market, I wouldn’t put the market price much above that either. In fact, since I had started negotiating the property over the last month or so, two bids came in around $750K, from what I hear around town. (An important thing you will learn if you concentrate on properties in a specific area is that the rental property ownership world is actually much smaller than you would think. You can often find out information or figure out who is bidding on a particular property by just keeping your eyes and ears open, and through local networking.)

Trying to be fair, I started my bid in the low $800K range. I then moved up into the $825K range after the Seller countered below $900K. However, I just learned from one of my networking contacts, that today someone just outbid me. Unfortunately, he actually bid higher than the first counter offer the Seller had given me!

That tells me a couple of things. First, that bidder didn’t put his initial offer in low enough. Second, both a market analysis and projection of net operating income and cash flow shows he’s already paying too much and probably hasn’t analyzed the property well. Even if he has a large amount of money to put down, paying a price that’s too high is foolish. Wealth in property (capital appreciation) is built over time and is directly related to the price at which you purchase that property. Of course that’s not the only factor, but it sure is a primary one. You can buy the right property at the wrong price and never make any money!

There is a lesson in this scenario. You may lose a deal like this one. But, never get into a bidding war just because you “really like” the property. I don’t get into bidding wars over properties. I refuse to pay too much and get emotionally involved. So, in a case like this, it would be better to wait and see if the Seller accepts the offer from the new bidder. If he does, I’ll still keep in contact with the agent over the next several weeks, just in case the deal falls through. That’s happened to me before where I’ve been able to pick up a property at a great price simply because the Seller was more motivated after the other deal had crashed. When that happens, the Seller is often more motivated to try and negotiate with me, since not only do I present myself as a serious buyer, but the Seller is regrouping from an emotional “letdown” of not being able to close the first deal as quickly and easily and for the price he had hoped. In essence, I catch the deal on the rebound.

There are always deals. Sometimes you just need to be patient. Sometimes things don’t work out exactly as planned. That’s okay, just move on to the next deal. In any case, keep you head on straight, negotiate fairly, and for the last time… DON’T OVERPAY just because someone else is willing to bid higher than you!

Best of luck and happy property hunting!
-Steve