Common wisdom says don’t fall in love with a property.
Unfortunately, many of us, including seasoned investors, fall into the trap of falling in love with (what we perceive to be) a must-have, unbeatable, one-of-a-kind property. In our minds, this is the property of our dreams; if we could add it to our portfolio, we’ll surely be able to turn it into a profit no matter what the initial cost.
When we step back and look at it logically, however, we know that this is a mistake. In the long run, it only makes sense to purchase the property when it fits your goals.
In my real estate experience, I have learned that it pays to be patient.
I recently talked with a gentleman who was considering an investment property, but wasn’t sure about the costs. He loved the house and the lot, but was apprehensive about the purchase price.
After gaining more information about the property and the bidding situation, I recommended that he place a bid that makes sense to him, then move on. If he wins the property, great! If not, fine. He hasn’t overextended and he still has the financial resources to pursue another property; which will inevitably come up.
Let’s take a closer look at this gentleman’s investment situation and dissect why I recommended a lower, unaggressive bid…
Purchase or Pass: Making the Right Decision
My coaching client was looking for advice on a specific property that was available in his area. The property has many things going for it: it was in St. Catharine’s, it was near the lake, and, as the client said, it’s a simply gorgeous home. To make the property even more desirable, St. Catharine property values have been shooting upwards, which added more desirability to the property from an investment perspective.
However, the price was a little out of my coaching client’s range and a little too tight to make financial sense. Similar properties, while listed for roughly $360,000 to $380,000, were selling for nearly $420,000. The bidding wars have been driving prices up, and the client has every reasons to believe that this property will continue the trend. If he seriously wanted the property, he’d have to bid about $425,000 to even have a chance.
Number’s aside, there’s also the coaching client’s personal situation. In his words, he’s “itching” to do a project and desperately wants to have this house. He sees it as an attractive property that he would love to have under his wing. He has already put bids in for four other properties, and lost all of them, which only adds to his eagerness. This will be his fifth, and he’d really like to get things started.
What should he do?
My advice to this coaching client was simple: place an offer that makes financial sense to you, then move on.
Don’t stretch your capital just to win an attractive home in a high-demand area. There are other properties, and there will always be other properties. It’s best to wait, and find a property that works for your needs.
For this property, the numbers need to come down for it to be viable for my coaching client. There needs to be more room for the client to make a significant profit on this home, and while the property is all but guaranteed to go up in value, the numbers simply don’t make sense. The price would need to come down to $400,000 or lower; any more than that and we felt the purchase was simply too large of a risk, based on comparable properties using the after repair value and based on market rents.
It’s understandable that my coaching client would be eager to get a project started. He felt that, having four previous offers rejected, it was time to get aggressive and win the fifth. But quite frankly, at five offers, he’s just getting started. There will be more properties available next week, next month, and next year. He’ll get one that’s right, and in this case it’s best to wait. The numbers were too tight, and we strongly encouraged him not to go up.
It’s important to place your time and energy into finding good deals. Put your hustle into finding properties that you can win without the competition of a bidding war. Look for properties that work for you, and focus on finding the right deal, not outbidding the competition.
After all, if you go where everybody else goes, you’ll get what everybody else gets; you’ll be part of the crowd. At Durham Real Estate Investors Club, we’re not focused on being part of the crowd, we are focused on being exceptional.
There’s another important lesson buried in this story. You don’t want to be the person winning multiple bids with ten people. Think about it: if you are consistently winning every property that comes across your desk, are you really getting good deals?
One fact is obvious: you are paying the most. Over an extended period, winning properties against multiple bidders can be a losing proposition.
Others, of course, may say that it’s best pick up the property at practically any cost. After all, it will be worth more in a year, so why not scoop it up and sell it after 12 months? But that’s just not how we do things.
We look for value, then we add value, then we make a solid profit.
Considering the costs and specific situation of the coaching client, we are confident that, in this case, making a low, conservative bid and seeing what happens is the right choice. It sets the gentleman up for a great opportunity is he wins the property, yet helps him avoid a potentially damaging situation.
There needs to be more wiggle room, and more properties will be available soon. In fact, there was probably a good property available by the time we finished talking with the client!
Personal advertising and working on your own deals is the best way to succeed in real estate investments, and that’s what we confidently recommended to this client.
By sticking close to his budget and maintaining discipline with bidding, this coaching client will be better equipped for long-term success!
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.