Last week I received a phone call on some foreclosure deals here in the metro Detroit area. It was a good tip and I responded quickly (you have to in this market!) As I screened out these properties, the numbers machine in my brain started working:

• Was the buy price correct?
• What were the exit strategies?
• What were the risks?

And so on. Kind of like a computer program that runs each time you press a button, my investing brain kicks in when I see deals that I like. I mentally picture which private money I’m going to place in the deal and how the cash will flow from A to B to C.

This is the fun part of real estate investing.

As I broke the deal numbers down, the numbers looked marginal at first (meaning everything would have to go right in order for me to make my required return as well as pay my private money investors back) and as I looked closer at all the details, I began to see that these few properties weren’t going to work at all for me.

I called the guy back who had sent these deals to me and told him that I was going to have to pass on this one. Why did I pass on what originally seemed like such a good deal?

Here’s what I was looking at:

• a package of single family houses
• purchase price points were advertised as 30% of ARV (after-repair-value), but upon closer analysis ended up being around 50%-60% ARV
• total investment required would have been about $500,000
• best-case scenario profit: $100,000, worst case scenario profit: $0.00 (this is the first uh-oh factor when considering proposing deals to private investors…more on this later)
• time frame to realization would have been between 60-120 days, depending

So, what’s so bad about this deal? There just wasn’t enough meat on the bone for me to put my private investors money on the line for it. The ROI for my investors would have had to be between 10% – 15% on a deal like this and I want to put at least a high five-figure or six figure paycheck in for my company as well. Since my best case at the outset was $100,000 total profit, I couldn’t see paying even close to the asking price. I did put in a bid for about 35% less than asking price (hey, you never know so you always ask!), but it was turned down. I told the agent representing the seller (an institution of some kind) that I stood at the ready with my all cash offer (check out my Ready.Fire.Aim approach to learn more about this) if they changed their mind.

The deal ended up going to another real estate investment company who was willing to pay more than I was.  I couldn’t help but wonder if the investment company that took the deal had used private money on it. If they did (which I hope not), they were putting a lot of faith in a ‘best case’ scenario. The thing you always have to do when you’re working with private money investors for your real estate deals is work in at least a comfortable profit for your investor and yourself, even if things don’t go perfectly according to plan. The ‘margin of safety’ concept with private money, where you make sure that there is at least a 20%-30% buffer zone margin for your investors return has been very important for me in attracting private investors to fund my deals. You won’t get the $500,000 private money check if you don’t take care of the $50,000 one.

One of the biggest advantages to having private money investors behind you in your real estate investing business is that you can stand at ready to scoop up deals that fall through AND you can aggressively hunt for deals that others think are too big of game (they’re hunting elephants with a .22 and your going out with a private money Howitzer cannon!). But, with this great power comes great responsibility. You must closely scrutinize each deal for best case and worst case and make sure yours and your private investors profits are protected.

Far too many real estate investors want to jump at the first deal or place their investors money in deals that are marginal. In this market, there’s no need to settle for less profits than you need to. The deals are there – take a fine tooth comb and place your private investors funds wisely. You’ll be far wealthier for it.