The Lesson I Learned From Taking A Loss

Posted by Ed DePrato on Thursday, July 17th, 2014 at 8:12am.

We all know that lessons are often learned by listening to the advice of those who have come before us; either in person, or in print those of us who can learn this way often fair better than those who need to actually touch the stove to know the consequences of both doing so, and for directly disobeying the advice of someone who knows better. And although there’s really nothing that would change my personal conviction to the asset class of Investment real estate, a lesson I learned and a small loss I suffered still serve to protect me to this day.

As with many things in life, investing in real estate is an ongoing education; a learning process that doesn’t end! Obviously when starting out we have the most to learn, and although I had read all I could on the subject, and spoke with as many of those who had come before me, my early successes with flipping houses and creating terrific cashflow from well selected holding properties caused me to make the mistake of thinking that this was easy. Don’t get me wrong, it’s not hard. Successful investing in real estate is actually quite simple, but it’s not easy to always be profitable and it’s important to always be thorough.

My moment of placing my hand on the stove came in the summer of my second year of investing. I was approached by my brother in law about a condo he had found for sale by owner listed in the classified section of the Edmonton Journal. I remember the conversation like it was yesterday... “Hey Ed, there’s great deal on a condo for sale listed in the journal. The seller is asking $130,000 and he told me he’d take $120,000; wanna partner on it?” Joe was so enthusiastic! As if he’d just found plutonium or struck gold in his back yard. So, knowing that Joe was also a budding investor and someone who’s opinion I’d come to value and trust, I agreed to partner on the deal – without seeing the property. I assured Joe that if he put the deal together, I’d share it 50/50 and he proceeded to secure the deal immediately at a sale price of $120,000 with a $4000 deposit – for which I’d pay 1⁄2.

I went online to look at the comparables and found more than 1 condo apartment buildings contained the word (or a variation there-of) ‘water’ in the title. There’s Waters Edge, The Waterford house, Waterfront Pointe, WaterSide Estates, Waterstone and Waterside of Chestermere... So I called Joe to discuss what I’d found and although he couldn’t recall the name of the building he assured me that his newest deal was a steal! We were making off like bandits. I trusted his opinion – he was someone I’d successfully done deals with before and I had no reason to question him as though I had any doubt. So I gladly paid my 1⁄2 of the deposit and proceeded to arrange financing and set up the closing on what was going to be a flip for a quick $20,000 profit that Joe and I both planned to roll into other deals we were involved with.

As closing day approached I received a call from my lawyer who advised that there was a problem. He said that the lender was only willing to lend on a value of $110,000 based on the appraised value. What?! Imagine the feeling I had knowing that an appraisers opinion of value was $10,000 less than what we’d committed to pay. Less! Not even equal. Clearly Joe had not looked at the comparables or perhaps looked at the comparables for a different building. So this was not the ‘deal’ we thought it was and we needed to back out of the commitment and walk away from our deposit. The seller here was gracious enough to only keep our deposit of $4000. He could have caused us far more grief, but elected to walk away with a $4000 handshake and resell his property to another buyer.

The lesson was not to make sure that whomever you partner with does their homework properly; and it’s not event to check the due diligence of others. I learned (by burning my fingers) that I’m accountable to myself. Nobody else is going to mind your investment as well as you. Now, I check and double check my own exit strategy before getting involved with any deal – on my own, regardless of who I partner with.

1 Response to "The Lesson I Learned From Taking A Loss"

Lisa wrote: Hi Ed, love this blog post. I really appreciate you being open enough to share the lessons you learned the hard way.

Posted on Friday, July 18th, 2014 at 6:45am.

Leave a Comment