Should You Pay Full Price for an Investment Property?

Should You pay full price for an investment property?

When it comes to products, I strongly oppose paying full retail price and as such will often wait for an item to go on sale before purchasing.  I love bargains and I enjoy getting a good deal on something.

I love bargains with real estate as well.  The thrill of a good buy is exciting and invigorating, however, my definition for a bargain in real estate is very different from my definition of a bargain with a product.

 

What is a bargain in real estate?

A bargain in real estate has nothing to do with the asking price.  The asking price IS important in that it might tell me whether or not I should give the property any attention, but it’s the purchase price that determines whether or not I’m actually getting a bargain in real estate.

A bargain in real estate is purchasing a property for less than the value you place on it.  The value you assign to an investment property may be based on other comparable properties, but it might also be based on internal considerations that are only important to you.

 

Price isn’t the only consideration

Price is an important consideration when deciding whether or not you should purchase a property, but it isn’t the only consideration and just because a property is a bargain, doesn’t mean you should always purchase it.  There are a number of other factors (e.g. location, trophy asset, tenant, guarantor, lease terms, stability, inheritance, etc.) that should be considered and if the property works with these other factors, then maybe price takes a back seat in the negotiations…

Consider an investor who owns a property that is landlocked, meaning the property doesn’t have any legal way to access it.  The neighboring property becomes available to purchase.  If the investor purchases the neighboring property, not only do they gain the value of the neighboring property, but they increase the value of their own existing property as well, therefore the “value” of the property that is now on the market might be higher for the investor than it is for other potential buyers.

 

Should I pay full price for an investment property?

If you’ve done your homework (and if you haven’t, hopefully your broker has), you’ll have a pretty good idea of the value of an investment property when it’s first made available for purchase.  You’ll be able to compare the asking price to your own internal value as well as how it compares to other similar properties.  The comparison to other similar properties is important for two reasons: 1) it may help you with your own internal valuation and 2) it will help you understand how others perceive the property and as a result, it will help you assess how much competition there will be for the property.

You’ll probably never know for sure how much competition there is for a property, but if the property is a good deal for you and you expect competition with others to be high then you need to be prepared to act quickly.  This isn’t the time to hesitate.  If there’s a lot of competition, the decision to act quickly may be the difference maker between a solid investment in hand or another good investment opportunity that slipped through the fingers.  I’ve been the seller who has received multiple offers on a property (some above my asking price) and I’ve been the buyer competing with several other buyers on a good investment property.  I have my share of triumphs, but I also have my share of “woulda, coulda, shoulda’s”.

In short, asking price isn’t the factor to determine whether or not a property is a bargain so don’t be concerned about paying full price (and in some cases above asking price), if doing so allows you to purchase the property at a bargain value for you.

At this point, you haven’t completed the due diligence yet so you don’t know if the actual performance of the property matches the advertised performance, but that will come later.

 

If you can purchase the property for less, do it!

In stating the above, I’m certainly not advocating you pay full price for a property just because the property is a good deal.  If you can purchase the property for less, do it!  My point is simply, seek to get the best deal possible for you, but don’t let asking price be the determining factor to whether or not you got a good deal.

 

Average selling price of single tenant triple net lease properties

In my experience, the average selling price for a single tenant triple net lease property falls within the range of 95% – 100% of the sellers asking price.  This of course varies based on a number of factors and is only a general guideline, but because of the many desirable qualities of this asset type, there is typically a decent amount of competition among buyers.  Be prepared by doing your research ahead of time and when the right opportunity presents itself, be ready to strike quickly.  Good luck with your real estate investing!

 

For additional information about the purchase of single tenant triple net (NNN) lease properties, please visit the NNN Resource Center.

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