No project will ever go off without a single hitch in the plans.
Still, when looking at a potential new investment, it helps to do an initial analysis of how things would work out if everything did go perfectly. If the plan wouldn’t work even without any major mishaps, it’s a good idea to walk away at the very beginning.
It always starts out the same way, I think: going after the idea that is too good to be true. We had a project where we were going to develop student housing very close to Arizona State University, a college that desperately needed it. We had a great location that we thought was a really good idea, and what could go wrong?
I had a couple of partners that I had met through my business. One was a well-known commercial real estate agent, and another had some other real estate development under his belt. They had identified this location where there were several four-plexes that were all individually owned but kind of made up a complex within walking distance of the university. They had the idea of assembling this land to group these properties together, tear them down, and build a really nice complex for student housing.
I invested a lot of money and time in this project. I learned some ideas about development, but I also learned that things that seem like a good idea and great for the community don’t always turn out so great. Sometimes the community doesn’t agree that your project would be good for it, and sometimes the zoning committee doesn’t agree.
Who would have thought that the people living in a nice area with these run-down four-plexes wouldn’t want a new, nice building put in place? They were worried that this would attract a bunch of rowdy students as well as traffic and other issues. I think we came up with some good ways to address it, but they really just didn’t want to hear it.
At this point we had made options and locked up all the properties, though we hadn’t bought them, yet. There was probably a couple hundred thousand dollars between all of the investors just for the options to get us through to finishing the deal. We were working with banks to get the ultimate financing to purchase as well as construction financing.
From the attorneys, we were getting the impression that we shouldn’t worry because there were some formalities we had to go through, but that we would get there. As we kept going, we kept spending money on other things like architectural projects. After going through and getting some initial architectural work down, we started looking at the costs. The costs were starting to get really high. But we kept looking at the end result, and we kind of agreed that it would be worth it because it was a necessary project and we were going to make so much money on it.
That was probably the second red flag. A really good analysis of the cost and potential revenue even in the most conservative way would have been good. That vision for what it could be, and that potential, just kind of put blinders on me. Unfortunately the hype of this whole project just got me away from looking at: Is there even a potential for success if everything goes perfectly?
The point of no return was after we made some revisions to the structure and the building to try to bring the costs down. It was going to bring the revenue down as well because we were bringing down the scale, but we were still confident that our numbers might have changed the math on the whole thing.
Then, we came down to the real estate bubble crash. The bank we went to said they were not doing any more real estate loans for the foreseeable future. We got the same replies from a couple of other banks that we had been talking to. Our options were beginning to expire. Our money was on the line; some of our investors’ money was on the line. The only way we could see of salvaging anything from this project was potentially selling our project to someone else. But, it would be completely worthless without all of the options in place.
We started having to close on some of these options where we couldn’t get them to give us an extension. And now we were getting into using my own money. I was stretching my credit to the limit to start buying some of these properties. Some of the other partners were doing the same. We knew there was no way we were going to be able to build this project at this point, but we still had hope that someone else with deeper pockets would come along and realize the great idea that we had. This would at least help us break even or at least walk away with the minimum loss.
However, as we were talking to more people, we realized that our idea wasn’t so great after all. There were other projects, much better than ours, going on already. There were no buyers. There was no way we could keep buying properties and making the mortgage payments.
I started trying to figure out an exit strategy. We lost some properties that went into foreclosure. Our credit took a big hit. There was no good outcome.
We stopped making all payments and let everything fall. We literally just walked away. There was no other way to go at that point. At least, no other way that we could see.
My credit rating tanked. Even though I had never had any problems with anything other than this project, all of my credit cards were cancelled. My CPA firm credit line was cancelled. Everybody left. It forced my wife and I to become very cash focused. It put our business in jeopardy. We had used up our reserves, and the banks weren’t going to help us any. We had some clients who were involved, and that hurt our reputation, as well.
However, I took away a couple of positive things from this. One is that I can very well relate to my clients who are going through foreclosure. I can speak from complete personal experience. The other thing is that it’s a weird feeling when you know that you can lose so much money and still survive. It’s almost a pride thing. Once you face that horrible thing you see at the end, it’s not great, but it’s not as bad as you thought it would be.
You really don’t have an option but to keep going forward and make things work. With our business and our life, there was a bright sunset at the end of that ordeal. Today, our credit rating is back up, and the bank likes me again.
- Why did this failure experience happen to you?
Because I forgot the basic premise that I always put forward: Do the analysis and make sure it makes sense. I let the emotion and excitement of a big score or big project get in the way of that.
- What is the single most important lesson you learned from this?
Don’t let the potential great outcome get in the way of the idea that even something that’s “too good to fail” can still fail. Execution and having the right people involved is so important.
- How do you protect yourself from failing this way again?
Just by going back and doing that gut check, that initial analysis. If everything works perfectly, will this still work? If it can’t work when everything is going perfectly, then maybe you shouldn’t be there.
- What advice would you give to someone else in a similar position who’s considering an investment opportunity like this?
Do the analysis. Look at how it’s going to turn out. But, don’t be afraid. The failure didn’t end our life. Don’t let a particular experience scare you from investing ever again.
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