WHY LOW PURCHASE PRICES ARE HIGHLY OVERRATED!

Today, Buyers love to talk about the low price that they got on the purchase of a property at foreclosure, or at a short sale.  Unfortunately, many Buyers bragging about the low price of their purchase would have done much better if they had focused on what is important! Interestingly, many claims of low prices are based upon comparison with the previous sale of the property at the peak of the market, rather than comparison with current sales of comparable properties.  As a result, some so called “low prices” are more “feel good-ego stroking” than reality!

Money HouseExperienced real estate investors are aware of the old saying — You earn your profit when you buy. While I personally subscribe to the wisdom of this old saying, it is important to recognize that the term “PROFIT” is not defined.  If a property is purchased at a low price but with expensive financing that results in severe negative cash flow, will a low purchase price always guarantee a profit?  This conundrum leads to another old saying – I will pay your price, if you will accept my terms. I also personally subscribe to the wisdom of this old saying because I have sometimes earned greater profit by paying market value, or more, but negotiating extremely attractive terms.

While there is much wisdom in these two old sayings, the greatest wisdom in buying real estate is unknown to many Buyers and investors.  The greatest wisdom that will enable you to make great real estate purchases is – Have a clear real estate strategy and know the purpose of each purchase.”

A property wholesaler or flipper, will have a totally different strategy than a long term investor desiring cash flow.  And a rehabber will have a different strategy than someone buying for personal occupancy.  Consider the following examples:

  • From the mid 70s until the late 80s, I was a syndicator.  By time Alaska’s real estate market crashed in the late 80s, due to low oil prices, as the General Partner, I had personally guaranteed $40 million in debt secured by $50 million in property.  However, when property values dropped by 50 to 70%, I was soon bankrupt.  My income also dropped by 80% and I could no longer afford the large home I lived in. Since by then, our youngest daughter was only home  during summer vacations from college, my wife and I were willing to move into a smaller town home.  And although we still had enough cash for a down payment we did not qualify for any loan program in existence at that time, and we did not want to rent.  Our solution was to buy a comfortable town home for which we paid $15,000 more than market value, because the Seller was willing to provide a Seller Financed wrap around on her existing loan. We still live in this home today and its current value is more than double the inflated price that we paid.  Even though we paid more than market value, the purchase had a purpose of satisfying our strategy of buying a comfortable and affordable home that we could finance.

 

  • My friend, David Campbell, is building new rental homes in Dallas that he is selling at market value. But because he carries back 2nds at 5% interest, an investor can purchase a brand new, rental property for only 5% down, that will cash flow!  Although, David’s homes are not being sold at low prices, they are an attractive investment for many long term investors.  To learn more about this program, go to – Hassle Free Cash Flow Investing.Hassle Free Cash Flow House

As you can see from the above examples, a low price is not important if the purpose of the purchase meets your real estate strategy!

 

P.S.  If you would like to lose a few pounds and would like to know how I have lost 140 pounds so far, go to http://fatdoctor.tv/2011/04/18/ken-gains-big-loss-episode-54/ and see Dr. Greg Oliver’s interview with me.