Posted by Jim Kennedy - Houston, TX on November 11, 2000 at 16:08:31:
I understand your frustration. Life and the real estate investing business are full of disappointments. They come with the territory. We simply have to deal with 'em and move on.
But in the process of “moving on”, one thing we should always do after experiencing one of life’s little disappointments, is to analyze the experience and try to learn from it.
Let’s analyze your deal.
First, let’s look at the numbers. You wrote that comps indicate the FMV is between $125K and $140K. If I were looking at this deal for myself, I’d use the most conservative figure - $125K. You also wrote that the house needs repairs - $5K to $10K. Again, I’d use the most conservative figure - $10K. You wrote that the first is $95K and you can buy the $42K second for $6,350. To summarize:
$95,000 . . . . first
+$6,350 . . . . second
+$10,000 . . . repairs
=$111,350 . . total
$125K FMV minus $111,350 = $13,650 profit potential.
Your investor would have to come up with $16,350 in cash to make a $13,650 profit. If I were looking at this deal, I wouldn’t be very interested. Based on the numbers, I’d be buying at about 89% of FMV. Those kinds of deals are a dime a dozen and, again, I wouldn’t be very interested. You didn’t give us any information about the rental market, but if I were planning to hold the property and use it as a rental, I’d have to see some pretty healthy cash flow in order for this deal to have any appeal as a rental. Obviously, you recognize that the deal is skinny because you wrote “The numbers are thin but this guy buys houses a little below market value in great neighborhoods.” BTW, thus far we’ve ignored any transaction costs. When you add in closing cost, etc., the deal becomes even less attractive. You also mentioned that there is an auction scheduled for November 15th. Is the first lien holder foreclosing? If so, does your $95K figure include all the fees and the amount of all arrearages? Plus, I assume that you’re not doing this deal simply for the fun of it, so I expect that you’re looking to make a profit for yourself. How much were you looking to make and how was it structured into the deal? These questions are rhetorical and are merely meant to help you analyze the deal. About the only way I would do this deal is with a PACTrust? or if I had a buyer already lined up, just like you thought you had.
Now let’s look at your investor. You wrote that your investor told you in advance to pursue the deal. Did you establish under what terms and conditions he would take the deal? You wrote that “… this guy buys houses a little below market value in great neighborhoods. This is ideal for him.” Apparently the deal isn’t as “ideal for him” as you think or he’d be buying. There must be something that’s keeping him from buying. Have you tried to find out what his objection is? You also wrote that he’d already backed out of one “gentlemen’s agreement” so you very wisely didn’t put any of your own money in the deal. Have you completed a deal with this investor in the past? If not, I’d want to be pretty darn sure that I knew exactly what his buying parameters are. On this particular deal, you might have said something like, “Mr. Investor, since the house is worth at least $125K, the first is $95K, the repairs will cost no more than $10K and IF I can get the second for less than $7,500, is there anything that would keep you from buying this deal?” Or, before negotiating the second, you could have said something like, “Mr. Investor, we’ve already agreed that the house is worth at least $125K; we know that the first is $95K and that the repairs will cost no more than $10K. How low would I have to get the second to come down from $42K in order for you to buy this deal?” You wrote, “He wants me to continue looking for other deals like this for him.” If he wants deals like this, why isn’t he buying this one? Thus far, he’s backed out of two deals with you. I sure wouldn’t spend much time and effort searching for similar deals for him until I knew that he’s truly a serious buyer.
Stew, please understand that it’s pretty easy for me to sit here and act like a “Monday morning quarterback”, but my intention in doing so is only to help you with deals in the future. Good luck with your next one!
Hope this helps.
Best of Success!!