Waiting for a perfect deal, and how much is too much?

I have a friend that has flipped a few more houses than I have personally. He has been working as an investor and subcontractor for several years, and he knows the numbers. He also works with qualified partners for title, hard money, and appraisal. In short, he has all the tools he needs to be a successful investor and make good deals.

This is the story of how he lost out on a great opportunity, and how he put over 18 months of effort into a deal that just slipped through his fingers.

Lets call him John. John lives in a comfortable neighborhood in the south of Salt Lake Valley. John had an acquaintance that lived just around the corner from him that came upon hard financial times and decided to abandon his home and allow the bank to work its slow magic. Shortly into the process he spoke with John about it, and having a better knowledge of the opportunity that presented itself explained how a short sale works, and that he would be interested in making an offer on the home and purchasing it at a discount from the bank. Because of this relationship, the Seller agreed to make the necessary calls, list his home with a realtor that John recommended, and complete the hardship package required by the lender to submit for a short sale.

John expected a wonderful return from this find. Here are the initial numbers.

• After Repairs value for the property - $250,000 to $265,000
• Offer to the bank of - $115,000
• Repairs needed of - $20,000 to $25,000
• Hard money expenses - $11,200
• If all went well John expected to be able to pull down a profit of $70,000 to $80,000

John submitted his offer to the bank and started to wait. There was little movement at first, and the bank seemed to be waiting to see if another offer would come in. The realtor was marketing the property, however the Seller was firm on the idea that he was only interested in accepting the offer of his friend. I happen to be a believer in the idea the the Seller is in control of the property that they own, until the bank forecloses and follows the set forth procedure to do so. In my perfect world the Seller would feel empowered to control the process until the property is legally removed from them, but this is not the time for my soapbox speech.

Let's fast forward 18 months of waiting and communication with the bank holding out for a better offer and John, slowly raising his purchase price to $135,000.

The bank over the last 60 days has reordered the BPO (Brokers Price Opinion) and asked for updated information from Buyer and Seller, and asked for a highest and best from John as the Buyer. John reluctantly raised his offer to his highest yet of $140,000. At this point the bank counter offered $149,000.

At this point I want to emphasize that the market has changed, and being in December the ARV has adjusted down to about $250k. John has been so set on getting this amazing deal and potentially making $70-80k that he decides that the bank has no choice. His friend/Seller has lasted this long and also turned down an offer of "Cash for Keys" from the bank, and John feels like he is just days away from his "dream deal".

Well just this week the bank completed the foreclosure and auctioned the property at Trustee's sale. The home sold for $160,000 and the capital group that purchased the home is now offering this home back to John for a price of $175,000.

Back to our numbers to see how that falls for profit potential

• After Repairs value for the property - $250,000
• Purchase Price of - $175,000
• Repairs needed of - $25,000
• Hard money expenses - $16,800 (higher purchase plus repairs)
• After aproximately 10% for realtor commissions and fees, the profit margin is about $8200

I don't know about you, but that doesn't sound like it fits my expectation of profit potential for a flip opportunity.

This has caused me to reflect on how I always want to get an amazing deal on a property. But as I look back over the years, I too see this behavior in myself of expecting a perfect opportunity and holding out when I am right on the cusp because I feel my negotiation abilities are good and will pull me through.

I have another close friend. Let's call him Matt. Time and time again I have heard him speak to taking the deals that work, and making "base hits" vs. "home runs". Matt has a solid record of flipping properties and picking up rentals. I learned last night that out of over 65 projects he has only lost money on 2 or 3. I happen to know that some of those deals have been a "home run" and even one or two "Grand Slams". But I know that Matt is always busy, always purchasing properties, and keeping his crew working.

Ultimately, I know that I have missed out on these "base hit" deals due to waiting and holding out for the "home run".

If John had accepted and moved forward at the bank's offer of $149,000 he potentially would have still had a solid profit. Instead he has spent 18 months of waiting and planning only to miss out on the deal and look elsewhere.

Numbers for purchase of $149,000

• After Repairs value for the property - $250,000
• Bank counter offer of - $149,000
• Repairs needed of - $25,000
• Hard money expenses - $14,000
• After aproximately 10% for realtor commissions and fees
• Potential profit of $37,000