Paying too much even if the numbers make sense?

Question

I've been doing a bunch of research and analyzing like crazy. It seems to me that people mostly focus on the cash flow of small multifamily investments, which I understand. When I analyze properties that are appraised at around 130k but are asking 300k, the impression I get is that people are ok with paying well above the actual appraisal value because the property is income producing. Am I right? I could understand how you would pay a high price as long as the rest of the numbers make sense but I also don't want to fall for something dumb and pay to much right out of the gate.

Charlie MacPherson · Answer

Be sure you're differentiating appraisal and assessments.  Here in MA, we are theoretically at 100% valuation, meaning that properties are assessed at 100% of market value.

In practice, it never works out that way.  Assessments are nearly always FAR below the actual market value.  Of course, appraisals are almost always a better estimate of real market value.

Whether TX works the same way is something you have to determine.

You're only over-paying if the numbers don't work, right?

Andrew Campbell · Answer

If you know your criteria and your goals, then only you can answer if you are paying too much.  We'd all love to get pay as little as possible for a new asset, and it feels like right now--especially in Texas--there are many people willing to pay more than we are.

"All roads lead back to your spreadsheet" is something one of my mentors says a lot.  It doesn't matter if you feel like you are paying "too much".  If it fits your business model and meets your objectives, then figure out your maximum price. If you get the deal for that price or less, then you got a good deal.

Good luck!

John Leavelle · Answer

@Evan Appleton

You must decide what your goals are.  Set investing criteria.  Everyone is different.  If Cash Flow is one of your criteria then yes that would be important.  If you are looking to make a certain Return on your investment then that would be important.

As already stated a Tax assessment is not the same as an appraisal.  That is not a good method of analyzing a property to be a good value or not.  You need to determine the Market Value of the property based on recently sold comps.  Then you can decide if the property is over or under priced.

As far as whether it is a good Cash Flowing property goes.  It really depends on how it is acquired.  If you pay 100% cash for the property it doesn't matter how much.  Since you have no mortgage payment it will have very good Cash Flow.  However, your ROI will stink.  On the other hand, if you purchase with a conventional loan you must make sure the rental income covers the payment, operating expenses, and have something leftover in order to Cash Flow.

Jeff Greenberg · Answer

"income producing"  What does that mean?  I can find deals all around if that is the criteria.  Does it not matter that your 75k down payment is getting a 1% cash on cash return.  There are people that are happy with that are you?  What happens if there is a little blip in the economy. Will it still be "income producing" or will you have to feed the alligator.  I don't know what your goals are, but beating the bank would be a pretty low bar.

Paying too much even if the numbers make sense?

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