In Episode 14 of my video series Real Estate Deal Talk, the subject is a deal gone bad. The lesson is: Do your due diligence. It is massively, massively important.
The question comes from Cisco, via Twitter. It’s an awesome question – Would you please talk about a deal that went bad for you? – though honestly, it is kind of tough to talk about.
Here is what happened. We purchased a lot in Old Fourth Ward, a really hot neighborhood in Atlanta, for $200,000. It could have made us a ton of money, and everything looked good in the beginning. But as it turned out, we made nothing. Zero.
The reason is simple: We didn’t do our due diligence. And that’s embarrassing too, because for us, doing due diligence is super, super important. But we failed on that with this particular deal. We just didn’t do it properly.
We trusted the wrong people because we felt that they had a good grasp on what they were doing. We were convinced they understood that numbers are important, that timelines are important and that getting permits in a timely manner from the city is important. But unfortunately, they hadn’t really done that before, though we were led to believe they had.
And, boy, did that cost us. It cost us to the point that we had to sell the lot to another builder and we did not make any money at all. In fact, our net was zero.
In addition to the $200,000 purchase price, we had been paying about $5,000 in interest every month for about 10 months. Then our lender decided not to extend the note, since it was taking so long to get all the necessary permits.
As a matter of fact, we didn’t do our due diligence on this lender, either. Our lender was out of state and mainly focused on the commercial side, so didn’t really have any experience in residential new construction.
It seemed OK in the beginning. Initially, it’s awesome. Everyone wants to sell you something, get married, it’s great, but if you can’t go through the tough times with somebody, then things start to fall apart. And in this case, that all rested on my shoulders.
I didn’t do the due diligence on our architect, I didn’t do the due diligence on that expeditor, and I also didn’t do the due diligence on our lender. If I had, I’m convinced we would have made a ton of money on that deal. But instead we made nothing.
So anyway, that’s our little, sad, terrible story on that deal.
Actually, it was lucky that we walked away with nothing. This was a situation in which we easily could have lost $40,000 or $50,000. So the lesson, again, is keep doing your due diligence. I cannot emphasize how massively important that is.
When you find the right team, you do the due diligence, you work on your numbers and crush it out, you get a darn good product. So the next time you do a deal, remember: Find a deal, evaluate it, structure it, position it and exit. If you can feel confident about those steps before you get in the deal, you have a good chance of winning.
You can view Episode 14 of Real Estate Deal Talk here:
https://www.youtube.com/watch?v=ZKg4zPZo2hs
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