The common answer is, "No, you should never pay more than a property is worth." There a major reason for not doing so, and a few others why it can make sense. Let us begin with the reason for not.
Why You Wouldn't Pay More Than a Property is Worth
The traditional reason for not overpaying is that investors know they make money on the purchase by locking in the base profit. To explain; the average price of comparable properties currently on the market is, let us say, $X00,000. There are, say, 10 such comparable properties. One of them is owned by a very motivated seller, three others by sellers who are "prepared to make a deal if they have to," four others by sellers who are prepared to wait for the right buyer, and one by a seller who believes their property is just worth more than the others.
An astute buyer will decide that all are comparable, but the motivated seller either wants to, or must, liquidate as soon as possible. It makes sense to low-ball the offer, make a good deal, and close as soon as possible. The low price paid now has the profit already built in. The new owner does not need to wait for market to produce the profit. This property can be flipped immediately or held comfortably.
3 Reasons to Pay More Than It's Worth
1. The Market Will Change
Several properties are available for purchase. As an investor, two motivations to purchase are rental income and future resale value. Let us say that one of the available properties is much closer to public transport than the others and has been upgraded in ways that make it appealing to professionals who may become tenants or owners. That road or rail connection would take a new resident quickly and easily to the new major employer who will soon open a state-of-the-art manufacturing or research plant.
Once that plant opens, the market value will jump. It may, therefore, make sense to pay more than a property is worth today if, in a short time, the market value will increase enough to make that overpayment worthwhile. Having a lender who can also see the value of such an investment makes the decision easier still.
2. 1031 Exchange
A tax deferred exchange carries time limits as well as like-kind limits. An investor may be looking at a big tax bill if an exchange is not completed on time. Let us say the property "exchanged" is currently being matched by two other properties, but a third one is needed to equal the investment figure and satisfy the 1031 criteria.
The choice is clear - pay a large tax bill now or defer it by over-paying one of the other properties to meet the 1031 Exchange criteria. That overpayment on that one property may be well worthwhile in the long run.
3. Personal Choice
An investor finds a perfect future retirement home. It may be worth overpaying a little today, to be made up after a few years of market valuation and know that perfect future home is already yours.
There are times when it is worth paying more. If you are ready to buy, please click here to contact us.