Where do motivated buyers come from?

Question

Hello BP!

Everyone knows a term "motivated seller" and a certain images may pop up in one's mind when that term is heard. But about buyers? It looks like there are plenty of those came around in the last few years and they are pushing prices higher and higher.

So, what does a "motivated buyer" look like and what motivates them to go on a bidding war, pay the highest price, grossly overpay, and potentially lose money when the market turns?

To add a bit of clarity, I am referring to non-institutional buyers of 50+ units apartment complexes.

Thank youNick

Anastasia Jordan · Answer

[Turns on hood mode]

Know any drug dealers looking to go legit? There is your motivated buyer right there with cash on hand.

[Turns off hood mode]

Ned Carey · Answer

Many people simply don't know the hidden costs in all types of real estate. People grossly underestimate the real expenses of buy and hold. TV flipping shows often ignore holding costs. Many buyers of larger properties like commercial and both mid and large multi family don't understand the risks they are taking.

Everything goes through cycles; interest rates, affordability, rents, supply of housing, cap rates, rental vs home ownership etc.  A factor often talked about is Millennials, unlike earlier generations,  don't want to buy they want to rent.

All of these factor have swung in the direction to drive up multi family prices. Underwriting purchases may make sense at today's low interest rates. But what happens when some of those balls that have all swung in one direction, start to drop and swing the other way? This is a risk many don't understand.

Real estate has been on an upswing for a awhile now. Multi family, for a number of factors, didn't take much of a hit during the crash and people see the money being made and have regained their confidence in real estate.

Money being made. I want in = Motivation.

Russell Brazil · Answer

They come from The Phantom Zone

Michael Le · Answer

I've ran into 1031 money a few times too. Better to overpay by a $200-300k than owe taxes on $2M in capital gains.

Nick B. · Answer

@David Faulkner, I can imagine what a motivated SFR buyer is and how he/she feels because most of them are not investors :-) I like apartments better though...

David Faulkner · Answer

Forget about 50+ unit apartments for awhile, this is exactly why I love SFRs ... lots of motivated sellers as well as a bunch of motivated buyers all over the place at any given time ... buy from motivated sellers, and sell or rent to motivated buyers makes for a nice spread. My impression of a motivated SFR buyer: "Honey, look at that kitchen. The bathroom tiles are beautiful. I just love the color of the walls. We can move right in before the baby comes and not have to do anything. I have to have it!" :) Sorry if that is off topic a bit, but my point is that you just don't get that with a 50+ unit apartment complex...

Nick B. · Answer

1031 is definitely a factor but to what extent would they overpay? $200-300K on $10M is not much but $1M on $4M makes no sense.

BTW, just got an updated OM on the property I mentioned earlier. Property taxes are calculated on  ~60% of the asking price and expected to grow by 3% a year while in reality they grow by 30% if not more.

Account Closed · Answer

Some great insight already, i would just say loose credit standards, surplus capital, and low interest rates can all help fuel the buy side of the transaction.  Money is chasing yield and this can fuel asset prices when you look at all the investment vehicles that are out there. Also, some buyers may have a more competitive advantage than other buyers or can integrate an acquisition to enhance their economies of scale which can also create a strongly motivated buyer ( who can potentially pay more than anyone else ) .

Account Closed · Answer

@Nick B. If market conditions in San Francisco persist for the next 30 years, price trend (ceteris parisbus) would continue in the general direction it has been the last few decades.

What isn't known with specificity, is what shifts will occur with its population, local and regional economy, housing stock, demand for housing etc. in the future other than analyzing historical trends.

The market is always moving, up, down or sideways and unfortunately, some investors will often buy just before a downturn.

Account Closed · Answer

@Nick B.

If you are in certain nooks of California or in markets around the country were average home value is almost 7 or 8 times national average (if not more), you would be amazed what you yourself would do at certain rates.

Rates move markets. If rates are unusually low enough, an unusually high amount of buyers would typically enter the market, which can drive prices up. If you are buying at the prevailing price in such an environment, you are likely buying at some level of inflated prices.

A strong motivation to buy doesn't always mean buyer will always buy a property in excess of actual market value. They can just divert the intensity and motivation to buy to an underpriced or fairly priced property -- if there is actually inventory.

But if you are in a market with few or scarce inventory, and rates are unusually low, and you have to buy, some will overpay.

In San Francisco, sellers frequently get offers from buyers in excess of listed price purely due to the economics of the market there.. demand often is in excess of supply. If at one rate your mortgage is 3 times in excess of the average rent and at another rate, your mortgage equals (barely) market rent, you want to guess at what rate buyers will jump furiously into the market?

If a property barely cash flows at a low rate, whether you buy or not depends on your actual investment goals and objectives. Different markets experience yearly price growth that vary drastically; this may soften the impact of negative cash flow in markets were average values are extremely pricey compared to the national average.

Some investors though, pricey or not, won't buy a rental if it doesn't cash flow and especially if property values move at a snail's pace on a per year basis.

Where do motivated buyers come from?

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