Focus On What’s Most Important

There are times that I am asked by other investors (both newbies, and experienced), if you had to say ONE THING that is most important to success in investing, what would it be? My response is ALWAYS the same thing: “Purchase price is everything!”

There are many working parts in an investment property transaction, no two transactions are identical, and some may be more important or critical than others, however to me, the most critical is the purchase price.

I have no control over the value (AS IS or ARV), the market determines that. I have limited control over the improvement costs – as while I can negotiate on contractor costs, there is a floor on labor costs and supply costs as well. Other costs involved during acquisition and sale are often out of my, or I have limited control, but the one part that I feel that I have total control over is THE PURCHASE PRICE.

If I OVERPAY, then I have limited or no room to mess up in other areas, such as: rehab budget, selling price, length of time to rehab & sell tied to cost of funds, etc. So, why do investors over pay? Perhaps at times because they are a novice and not aware of values in the market, or aren’t savvy at running the numbers of the deal or costs tied to rehabbing, etc. But, all too often, its because the investor either gets caught up in the emotions of the purchase or is afraid of offending the seller (or the seller’s agent).

If the purchase price is in my mind the most critical part of the deal, why would I allow either of those two possibilities (emotions or fear) prevent me from focusing on getting the property at the price that is most important to me? I shouldn’t! In my opinion, if the first number that I throw out to the seller (or agents) doesn’t offend them or make them respond with emotions, then the figure is probably too high. In fact, getting the seller’s emotions involved is actually part of my negotiating strategy, but I will save that for another post.

Purchase price is everything, and if I can’t buy it for what makes sense in my math, then I don’t buy it. I don’t buy to lose, I buy to win.

If an investor shares with me that they focus on the cost of the money to do a deal rather than focus on the purchase price, then they are in my opinion focusing on the wrong thing.

Let’s say that they are lucky enough to get the use of the money for a ridiculous cost of 1 point and 4% interest, but if they over pay for the property and make no money on the transaction, at the end of the day, what have they truly accomplished? If the goal is to get cheap use of money, then maybe they hit the target. But in my projects, the goal is to make profits, and while the costs involved are both important and always there, they are not the area of my main focus. The old saying “Focus on the pennies and the dollars will take care of themselves” in my opinion applies to real estate transactions – focus on the purchase price and the rest will help carry you to the profit.