Cutting Your Losses Early...Know When It's Time To Bail On A Bad Deal
BATTLECALL GUEST EXPERT: Attorney William
Bronchick Of LegalWiz.com
When your primary plan of action doesn't work, you need to have a backup
strategy. This may involve switching gears from a retail sale to a rental or
rent-to-own deal. It may also involve dropping your price, dropping your rent,
or, if you are lucky enough to realize your mistake early, walking away from an
earnest money deposit instead of closing on a bad deal.
If you already closed and your exit plan didn't work out, sometimes the only
option is to bail out and cut your losses. It takes a big person to look in the
mirror and say, "I made a mistake." Too many investors let their ego get in the
way and hold on longer than they should and the bleeding never stops. If it's a
retail deal, then drop your price, even if it means losing money. If it's a
rental, drop your rent low enough to attract a solid tenant. If your monthly
carrying cost is $1,000 on a unit, it makes sense to drop your rent by $80 a
month rather than have a vacancy. In fact, if you're offering the property on a
lease with option to purchase, you may consider dropping the rent below market
and taking a monthly loss to make it up on the backend, assuming there's enough
equity to justify the monthly loss.
For example, suppose you buy a house for $150,000 and it's worth $200,000,
but because of a poor financing choice, your monthly payment is $1,300 a month.
Even if market rents are $1,100 a month, that doesn't mean you must hold out for
$1,300 a month. Too many investors think they need to hold out for the $1,300
monthly rent because their payment is $1,300. Wrong - the market will dictate
what you collect for rent, not your monthly mortgage payment. If you have a high
payment but sufficient equity, it makes more sense to rent it for $1,100 or even
$1,000 to get a qualified tenant who can eventually buy it for $200,000 in two
years. A loss of $300 for 24 months is only $6,800, which is justified when you
make $50,000 profit on the backend. A word of caution, though: Never compromise
your rental standards because it will cost you more in the long run for
evictions and repairs.
Over the past few years, many novice investors got into preconstruction
deals, anticipating a huge increase in prices by the time the development
finished. Instead, the values had flattened or dropped. Rather than walk away
from their deposits, many insisted on completing their purchases, hoping the
market would come back. They are often wrong, and end up selling the property
for less than they bought it for. If they stay in the game long term or have a
viable alternative exit strategy (such as renting in the meantime), they may
come out on top. But more often than not, the best course of action may be to
cut your losses early.
Like the old song goes...
"You got to know when to hold 'em, know when
to fold 'em,
Know when to walk away and know when to
run."
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