There's an old saying in real estate, “Money is made on the purchase, not on the sale.” In this post, I'll explain what money is made on the purchase means and why it's so true.
Getting a great deal on a real estate purchase is very important. And there are so many things we can do to make a great deal happen.
Despite the commission price fixing settlement with the National Association Of Realtors and other brokerages, it still costs a stubbornly high amount to sell property. Hence, if you don't have to sell your property, I wouldn't. Commissions are coming down, albeit slowly.
Why Money Is Made On The Purchase In Real Estate
A nearby house on the same side of my street sold for $1.56M. The house is the same style as mine with a similar floor plan, but has a 20% smaller lot and slightly inferior views due to a couple of trees blocking the ocean.
The neighboring house was in mediocre shape just like my house was when I purchased it for $1.23M in early 2014. Basic math shows a ~27% appreciation in 2.3 years, or a 134% cash on cash return based on a 20% down payment.
In retrospect, parlaying an expired 4% yielding CD into SF real estate was a good move so far. Let's see how much the market corrects this time around.
Skillfully Negotiating The Real Estate Purchase
I invited the selling agents, Nancy and Bob over after the sale to get the skinny on the market and provide an assessment of my home. After about four days of deliberation, they sent me a detailed valuation analysis report and said “they were 85% certain they'd be able to get at least $1.85M – $1.9M for my house.”
The total return would therefore be 31%-35% or a 155%-175% cash on cash return on the down payment if you include my ~$170,000 in remodeling costs. Gross profits = $440,000 – $490,000.
All these figures don't mean anything until my property actually sells. These figures are just nice to know in case I change my mind about holding San Francisco property forever. No other international city is so cheap with so many growing companies paying so well. If you have the proper skill-set, your income potential is incredible.
Check out the average salaries of software engineers for some of the largest tech/internet firms. Multiply these salaries by two and you've got a typical homebuyer on the West Coast.
Purchase Negotiations Is Everything
Here's where things got interesting. Nancy and Bob mentioned they were the realtors who represented the only other competing buyer on my house back in 2014!
John, the listing agent from 2014 was from out of town and listed my property as a favor to the sellers because he grew up in the house next door before he went off to college. He represented two sisters who moved to Washington. At age 73, John retired years ago from his day job in manufacturing.
The original asking price for my house was $1.24M and I offered $1.18M because it was on the market for four weeks already – on the longer end for SF standards. John had an offer date at the end of the third week but didn't receive anything good enough for them to accept.
Anchor Your Real Estate Offer Low To Get A Better Deal
John wasn't happy with my $1.18M offer because his buyers were expecting “way over asking” in the $1.4 – $1.5M range But John accepted my verbal offer after I told him I'd work directly with him. A buyer utilizing the listing agent to represent them can be an advantage. This is called dual agency.
This way, he wouldn't have to pay the buyer's agent their half of the total commission = $30,000. Having the selling agent represent you is a great strategy if you know what you're doing and trust the person.
I remember sitting down with John at the 1940s kitchen table listening to all his stories about the neighborhood growing up. He told me about a famous author that lived close by in the 1960s. He mentioned how the builder, Henry Doelger, lived in the mansion across the way. I even asked him for some life advice if he was 37 again. He said, “I would have saved more.“
After a couple hours of getting to know each other, we shook hands old school style about my $1.18M offer and my promise of working with him to make the transaction as smooth as possible. We hadn't signed any papers yet, but I felt he was someone I could trust.
Related: Use The FS20 Property Indicator To Help You Buy With Confidence
The Squeeze To Lower The Purchase Price
A day later, John came back to me all conflicted and said he had another higher offer that he had to present to the sellers. Buyers seem to come out of the woodwork once they know an initial offer has been placed. Although disappointed, it was his fiduciary duty to his sellers to present all offers.
I already knew I was getting a deal at $60,000 under asking based on the comps at the time. He was a retired agent who poorly marketed the property. In addition, he had zero pictures on the MLS and a broken “for sale” sign in the window. He didn't know how to leverage the internet, which was why the property was so under-marketed.
I just so happened to be driving around the neighborhood looking for ocean view homes when I saw the broken “for sale” sign.
After a long walk in the park, I called John and begrudgingly raised my offer price by $50,000 to $1.23M. I told him this was my best and final offer. I reminded him of our handshake agreement as well. Once he heard the news, he told me he would ignore the other buyer no matter what they countered.
Until now, I always wondered whether John was a grandmaster negotiator who bullshitted me into raising my offer price with a fake “I've got another higher offer” move. It's a common tactic to create emotional anxiety in potential buyers to raise their offers. Now I know he was being honest.
“We Would Have Offered Way More”
I told Nancy and Bob, the prospective realtors visiting my house this story and they told me their clients would have offered “way more” back in 2014. When I asked how much more, they responded, “up to $1.35M!”
$1.35M is in the ballpark because that would mean the property is up a realistic 15% in 2.3 years based on the $1.55M comp that just sold in 3Q2016. 15% is still a healthy 75% return on a 20% downpayment.
I asked Nancy and Bob why they didn't just offer more to win? They said when they contacted John to make the counter he told them that the deal was already ratified. He ignored their request! This time, John fought for me.
If you don't have the ability to make such a close connection like I did with the listing agent, write a real estate love letter. The real estate love letter will humanize your offer and convince the seller to go with you instead of someone else.
Building A Trusting Relationship Is Key To Getting A Better Real Estate Deal
Spending a couple of hours getting to know John basically saved me +$120,000 because I also would have come up to $1.35M back then if necessary. I had lost out on a property the month before where I offered $1.51M and the winner offered $1.8M! That house was listed for $1.2M. Nutso.
John told me he retired with enough money to live out his days. Therefore, his priority wasn't trying to get top dollar. Instead, he was more interested in getting the transaction done in as easy a manner as possible.
This is EXACTLY how I feel as an early retiree. Once you have enough money, the desire for more money begins to fade. You just want a big fat easy button you can press to make things happen.
Getting A Good Deal On The Purchase Is Key
Key point to remember. In real estate, getting the purchase right is paramount. You can always refinance your mortgage, but you can NEVER change your purchase price! This is one of the key reasons why money is made on the purchase.
A great purchase price helps create a perpetually lower tax basis, at least here in California due to Proposition 13. A great purchase price also improves your internal rate of return.
On May 29, 2024, a house with the same layout five doors down sold for $2.25 million. But the house has inferior views, isn't as newly remodeled, and has a smaller lot. I'm never going to sell my house I bought in 2014 if I don't have to. Instead, I'm going to keep it as an asset for my children.
Purchase Negotiation Recap
Here's a recap of why money is made on the purchase.
1) Understand what the sellers and the realtor want beyond just a high price.
Maybe the sellers want a three month rent back period so they can do a 1031 exchange. Be flexible moving in.
Maybe the sellers want to make sure the new owners keep their 70-year-old oak tree. Tell them you'll not only keep the tree, but prune it regularly and plant another oak tree to keep it company. They will love you for saying so due to the emotion attached to real estate. Listening is a crucial skill.
Take your time to analyze home price dynamics to make a more informed purchase decision. With more research and information, you might be able to buy below fair market value.
The last thing you want to do is get into a bidding war and winning right before the market starts turning down. Instead, it’s better to take advantage of stale, listings and motivated sellers to try to get a deal below fair market value.
2) Be a person of your word.
There once was a time when your word was your bond. Now people flake all the time because they are dishonorable and selfish. A person of their word shows up on time, responds to all phone calls and e-mails immediately, and commits to specific transaction milestones as expected, e.g. 3% deposit earnest money.
3) Build a relationship with the seller and the agent.
Write letters. Send pictures. Spend as much time talking in person or over the phone. Understand that it's much harder to screw a person over once they've developed a connection. The same concept goes for people trying to negotiate a severance. Most of you would never screw over your parents, siblings or loving spouse just for more money. People take care of people they like.
4) Get smart enough to thoroughly understand the real estate transaction process.
Under the documents so you can use the strategy of convincing the selling agent to represent you. You'll not only get the inside scoop on everything that comes up, you'll also be able to split the 2% – 3% commissions he saves by representing both sides. The internet should give you 80% of the information needed to transact. The other 20% will be gained by you poking holes in the drywall.
In November 2023, it was found by a Missouri jury the National Association of Realtors, Keller Williams, and HomeServices of America colluded to keep real estate commissions high. Therefore, if you plan to buy or sell in the future, you should aggressively negotiate down the commission price.
5) Methodically grow your network.
Your local realtor community is relatively small. The more people you know, the higher your chance of getting a heads up on an off-market opportunity or close a deal on more favorable terms.
Let's say the average person owns a home for 7 years before selling or moving. If you just get to know one realtor a month through leisurely open house hunting, you'd grow your network by 84 realtors.
The house we purchased in 2014 has turned out to be a home run. The walk-out deck off the master bedroom is done. I've frequently used the lower portion of the house during the pandemic as a sanctuary to write and enjoy the hot tub.
The joy of real estate blows away the joy of investing in the stock market. It's no fun being a passive investor collecting dividends while the real money gets made by senior management and majority shareholders.
Being able to take advantage of a 2.5% mortgage rate while also being able to deduct the interest off my income almost feels illegal. Knowing the property has appreciated by 60% – 70% since 2014 is just icing on the cake because I don't plan to sell.
6) Consider writing a price concession letter
Years later, I bought another house in 2019 and another one in 2020 after the lockdowns began. During both times, I was nervous about the purchases. As a result, I wrote a price concession letter after getting into contract.
The first price concession letter saved me $10,000. And the second price concession letter saved me $5,000 off closing costs and bought me one month more of time.
Although writing a price concession letter might seem a little shifty, if you write one in a respectful manner, it could help you save money. You will never know until you try!
Money Is Made On The Purchase
Buying real estate can be daunting, but it doesn't have to be. Do your best to think logically and not let your emotions get in the way.
Remember that money is made on the purchase because you're spending less than necessary through skillful negotiation. Money is not made on the sale because a wise person holds forever.
Real Estate Recommendation
Now that you know money is made on the purchase, not on the sale, it's time to buy. Real estate is my favorite asset class to build wealth. It generates income, provides shelter, and is much less volatile than stocks.
Take a look at Fundrise, one of the largest and most innovative private real estate managers today. Fundrise is the pioneer of the diversified eREIT fund. It runs over $3 billion in assets and has over 350,000 investors. Fundrise primarily invests in Sunbelt residential real estate where valuations are lower and yields are higher.
Another great real estate investing platform is CrowdStreet. CrowdStreet mainly focuses on individual real estate opportunities in 18-hour cities. 18-hour cities tend to have faster growth rates, lower valuations, and higher yields. If you are a real estate enthusiast and accredited investor, you can build your own select real estate fund.
I've personally invested $954,000 in real estate crowdfunding since 2016 to diversify and earn more passive income. Both sites are long-time sponsors of Financial, Samurai, and Financial Samurai is an investor in Fundrise.
Money Is Made On The Purchase is a Financial Samurai original post. Join 60,000+ people and sign up for my free weekly newsletter. I've been helping people achieve financial independence since 2009.
I liked your tip of building relationships with the seller and the agent. Our family is looking to buy a new home and I don’t have a great relationship with the sellers and agent right now. This tip has helped me realize I should build that relationship in order to make sure I buy the best home for us.
I liked that you said that one thing to consider when you are looking for a real estate agent to hire is someone who will sit down with you and perform a consultation to make sure that they understand all of your needs. I have been thinking about buying a new home but I have been worried that I won’t find a good real estate agent. I will be sure to consider reading reviews and ratings to make sure that I find a reputable agent that will listen to my needs and present me with homes that I would be interested in.
Good one! As a serial property investor myself back here in Malaysia, I have always believed in the adage:
“You make money in property when you first buy, then by holding the property and lastly making money selling the property again and again without giving away ownership”
That is why I focus on first buying below market value properties here in Malaysia. It acts as a safety buffer as well in case the economy tanks.
This is very good advice on buying real estate.
I would say that it’s important to have multiple targets so one could negotiate better.
Also it’s very important never to fall in love for a house so you don’t overpay.
I agree wholeheartedly about the premise of your article. Just last week I purchased a townhouse in Scottsdale, AZ. By owner transaction, and the seller simply needed a quick close. He also needed a leaseback for 4 months. Closed in one week, gave him a 4 month leaseback below market, all collected for on the settlement statement, and overall a 20% discount to as-is market value.
The best part is the remodel potential as $40K will equate to another $70K in value, conservatively.
Not to bring this thread to me personally, but the message is that being ready, with cash (or HELOC on primary residence), and immediately taking advantage of the opportunity given, will set you up with an advantage from day 1. There’s no question it’s “how you buy” despite other market factors.
Your example about the $120,000 savings just getting to know someone is so true. There’s a human element involved in every real estate transaction, and if you’re the one who goes the extra mile and really gets to know the situation and those involved, it can reap rewards every time.
I stumbled into buying at just the right time. I finally purchased my first home near the end of 2015 for $174,900. It was near the upper end of prices in the neighborhood, but well below asking prices for the city overall. Fast forward a year, and I find myself newly single with a court order to remove my ex-wife from the mortgage. As you’ve pointed out, refinance isn’t exactly a pleasant process these days, but I’m finally to the point where the home as been re-appraised. The new value is $212,000, which is ~22% increase in 14 months!
That is an incredible story. Nice work on getting the house for less than other would have paid. It really pays to network.
Sam,
Great post. I purchased my first 1 bedroom loft condo in 2014 at 309k and now it is worth close to 400k. What are your thoughts with renting out a condo in a prime area as part of the real estate accumulation fund? My condo is in a hip part of LOs Angeles and my thought is to acquire another property once I get another 20 percent down.
-GenWeFinance
Wow, this was a great article. And once again, I really appreciate you sharing your experiences. I haven’t dabbled in investment real estate, but I think the same philosophy applies to stocks and other financial securities as well. While there’s no possibility to get the kind of savings you did through personal relationship, the concept of value vs. price is always a good one to keep in mind.
Thanks again!
Jay
I can’t tell you how many times I lost out to another buyer, in the quest to add to the rental portfolio. Nine times out of ten I was outbid, but it’s certainly possible that in some instances, the seller and seller’s agent simply wanted to close the deal without hassle.
Investment buyers are tough nuts because we care more about inspections and negotiate harder with sellers to get issues repaired. Oh, and we get a double whammy if we don’t pay with cash.
Thanks, Sam, for a very informative post!
Money is definitely made on the purchase, but cash is made on the sale. And I like to say, cash is king.
Sorry for the lame attempt at a catch phrase, or whatever that is.
Our house has appreciated a lot, but until we sell the house, that money is all theoretical, and theoretical money doesn’t help my cash flow in retirement.
But renting it out for cash flow does.
Unfortunately, the rent I could charge (for now) wouldn’t produce much cash flow after paying the mortgage and property tax. When something breaks, I would probably end up with negative cash flow.
John is a prime example of why the real estate cartel in the US needs to be broken up. A simple online interface that connects sellers to buyers and lets the seller manage and reply to the offers (perhaps with some premium support/advice options) would be simpler, cheaper, and a million times more honest.
His dishonesty was downright shocking. And it’s presented as totally normal. So glad there is a comment on it. He and the author are peas in a pod and we should always be on our guard and assume anyone we might do business with is like this. We at least have a chance if we don’t assume everyone is honest.
Hi Sam,
I guess it doesn’t bother me that much if my property value goes up and down much (unless if affects taxes a lot) because I don’t plan to sell it. Also, what do you think about buying a newly constructed house VS an older house? I bought new so I can semi-customize some things and not have to worry about older appliances, pipes bursting, etc.
hey Sam, I agree partially that you make money on the purchase if you got a good deal. But if you don’t actually close and sell it’s still a paper profit.
I know you seem to favour real estate much more than stocks and you’ve done extremely well in the SF market. But again these “gains” are not yet realized. My folks bought a house in Vancouver 30 years ago, now it’s worth well over 10 times purchase price. But they don’t get cash flow from it as it’s their primary residence. Still need to pay property taxes, utilities, upkeep…even if the mortgage is long paid for. We’ve had our kitchen redone, all carpets, the roof. Could have bought a nice luxury car with that.
I’m more in the stocks camp, way less upkeep.
Why don’t you do an article talking about selling and locking in real profits in both housing and stocks. You say the reason why you started this blog was the crash of 08-09 where you lost 35% net worth, but if you didn’t sell at all you would have gained it all back and more with the bull run we’ve had.
Most people panic and dump when things go down and get back in far too late when the uptick comes.
Nice article. Except for the your usual SF being such a bargain personal opinion which comes across as completely ridiculous, you make good points. For most people, comparing SF prices with city centers of Manhattan, Paris, London, Tokyo is silly. Fair comparison of SF city is with Seattle, DC, Vancouver, and Boston.
Anybody want to give some input on how to approach dual representation with an agent? When does this ever benefit the seller?
Looking to make my first housing purchase in the next couple of months!
It sounds like you got an incredible deal all based on getting to know someone. Sounds like it was well worth your time and then some.
Isn’t it amazing that technology has not completely disrupted the real estate agent profession? You would think that technology would be able to potentially maximize deals for the client in the future opposed to what is perceived is the easiest transaction for the real estate agent.
Interesting article and well done on the purchase Sam. A couple opportunities we had to purchase our homes are relatable.
In 2010 Vancouver housing went through a short dip after the Olympic Games, specifically an area known as Olympic Village. A developer was selling condos, with townhouses attached and we purchased a pre-build 3bed and den townhouse for $700k ($140k down). Fast forward to May 2016 and we sold it for $1.565M, an increase of 865k and roughly 600% cash on cash.
We purchased a single family home in a similar area and managed to avoid a bidding war because the realtor did a poor job, as yours did. Lack of open houses, lack of photos on MLS, poor marketing. While we paid $1.8M our realtor felt he could flip with good marketing for $2M. The second part is fortunate because we have introduced a new tax on foreign purchasers, which may drop values. Hopefully it doesn’t drop out value below acquisition costs.
Sorry, I realized a third that ties to your relationships. Our realtor has access to VIP entry in presale projects and on multiple occassions we have put our hand-up and then carried through on purchases. We’ve also put 4+ other people into him that have purchased. As a result, he’s gotten us access to homes that are at the time ~10% to ~20% below market. Keep in mind they aren’t built. Both we have purchased were at blended rates of $550 psf and the areas are trading at an average of $850 psf. A good win on ~1,000 sf.
A question for you given your purchases in the past and the SF market. Have you seen the BC introduction of a foreign buyer tax? What do you think of it? What do you think the impact will be? Will it drive potentially more Chinese buyers to SanFran?
I’m shocked about the 15% foreign buyer tax. When I see a property tax on foreigners, it usually is a tax if the property is sold within a certain time period. The extra 15% tax against foreigners for just buying a property seems EXCESSIVE. Not only that, it throws in an UNCERTAINTY factor for all buyers of Vancouver property from now until the future.
In economic terms, we’ve seen a demand shock that permanently shifts the demand curve lower, and therefore, prices as well. I don’t see why a 15% foreigner tax doesn’t reduce values ACROSS THE BOARD by 15%.
We have not seen such a tax in SF. Yes, there are Chinese buyers here, but they don’t seem to be as prevalent as there. It’s as if there is some “Visit Vancouver, Buy Vancouver Property” in all Chinese tourist reading material or something.
I would expect Chinese buyers to check out Seattle and maybe Portland property, and then SF at the margin. These type of taxes can’t just pass without a long, drawn out vote and proxy fight.
But I’m also shocked the BC gov’t has allowed such an infiltration of hot foreign money to make housing so unaffordable to permanent residents. Why is this you think? Bribes? Desire for foreign direct investments?
I agree. Intrinsically I would expect a price decline of 15%. Especially for high-end homes that were being targeted by wealthy Chinese buyers. While it is the market seeing the most fluctuation, other markets, such as moderately priced single family, entry level – mid level apartments aren’t fluctuating highly.
Why? Some considerations are they’re being purchased by local purchasers to live in and supply remains limited. For those foreign buyers, factors still driving purchases – rising US dollar decreasing the cost of our RE when priced in Chinese Yuan. Also, the outflow of $s out of China continues largely unabated despite the Chinese Government saying they would shut down the out flows. When your choice is a 15% price hike in a stable market with a high population of Chinese and good access to home versus potentially losing everything back home, many are still choosing to buy.
Why did the government allow it to continue? I don’t think they could let it stop. Our economy is the #1 in a Country that is largely driven by resources because of the development and construction industry (keep in mind I work for a developer so may be biased). We are employing a large percentage of workers, paying high property transfer taxes, municipal fees, community amenity contributions (community centers, day cares, pre schools, affordable housing to name a few). Without this, our economy would be faltering. The only reason they’ve done anything, I believe, is that the public outcry was getting high and they feared they would not be electable in the next election.
Yes, agreed Seattle should see a big uptick and I believe it has.
Sam, you make this sound so easy. This is a lot of work to build a network of 84 agents over 7 years. Your success story shows that if you do it right, you can make good money in real estate.
My negotiations with my clients absolutely involve highlighting my honor and willingness to care about what they care about. I have the nice trick of knowing with certainty what other business-people are charging in my area for the same service. I know that they can go pay more for someone else or get the cheaper better service from me. Building my niche; one happy client at a time.
Hi Sam,
A regular on your blog. Great job! I might not agree a hundred percent with every post, but they sure get me thinking.
The title of this post got me thinking, again. My house was listed for $230k and I offered $237k for it. Ever since I bought it, a couple of houses in my neighbourhood with the same floor plan sold for much less, abt 231k. I have the money to make improvements (small yes, big maybe), but not sure how much I would be able to recover when I sell. I am able to buy the house outright though I have a 30 yr mortgage right now. I could also sell this one and hope to make a better deal on the next one. Its only been 8 mo. that i bought this house.
Any ideas on what to do? Thanks!
Sam
Your side of this story is great. You were schrewd, and behaved completely ethically.
However, i have huge issues with how that listing agent behaved. Even if he had dual agency and the sellers agreed to it he crossed the line.
The interesting thing is it seems that he was savvy enough to keep your offer verbal and the other buyers potential counter verbal. Perhaps by doing so he made it such that he “didnt have to present the counter” since it wasnt in writing?
This is why so many people feel that they cant trust their agents despite all their agents pleas that thye will do everything in their clients interests.
While i am delighted for you to have gotten such a good deal, the ephisode makes me mad at agents in general; as so many if them are all too happy to enrich themselves (comp on both sides of the transaction) at the expense of their clients.
As the saying goes, no one represents your interests better than yourself!
Hi I’m sorry to ask this, but can you explain this cash on cash return based on the down payment.
And just so my one brain cell can handle it, can we use my home for the example.
Closed for $265,000.00 on 8Aug2015. It is a VA loan so their was no real down payment. based on real estate sites I’ve check the average “comp price” is +/-$298,000.00.
Thank you for your time…
Greg
Sure.
$100,000 downpayment on $1M house. House goes up 10% to $1,100,000,
the return is $100,000 return / $100,000 cash downpayment = 100%.
Thank you!
I never negotiated a real estate deal, but I once negotiated a higher starting salary when I went to my second bank. They were offering me a personal banker salary that was lower than what tellers in my then-current bank were making. Even though they were a faster growing bank with better advancement opportunities, I began to tell the recruiter that I was rejecting the offer. I never quite got to the dreaded “r” word, though, as she countered with another $1.50/hour extra. Offer accepted.
Not quite the same as saving $120,000 on a real estate deal, but it was a nice little victory for me. I have so few of them.
Sincerely,
ARB–Angry Retail Banker
A win is a win! Progress is happiness in my eyes. Just keep on pushing to get paid what you believe you deserve to be worth.
I may have saved $120,000 on the purchase, but I can also lose boat loads of money as well like I mentioned in my last post.
AMEN BROTHER!
I couldn’t agree more!
In my opinion, real estate has proven time and time again that it is one of the best ways to build massive amounts of wealth (and cash flow) over time! Getting into a deal below market value only helps expedite this process! Awesome post, loved it!