“Don’t cling on to a mistake just because you spent ages making it.” I heard this quote from a business expert and thought it translates well into the property investment world.
What do I mean? Let me tell you about Michael…
I met Michael in 2019 who bought a flat in Portsmouth at auction. He started the refurbishment and later found out the freeholder was going to charge £18k for a lease extension. £18,000!!!!
Then the freeholder wanted another £6k for permission for a small extension to the flat that Michael had added (which wasn’t needed in my opinion).
AND, to top it all off, Mike ran out of money to finish the refurbishment. So the deal wasn’t turning out so well for him at this stage.
Side note: Personally, I would have contested those charges. They’re ridiculous.
Anyway, Michael was stuck. He’d bought the property with cash and couldn’t finish it. So all his cash was tied up in the property and he needed to get it out to finish the job or move on.
What would you do??? This is what Michael did…
First, Michael tried to sell the flat to recover all the money he’d put into it. Not happening… Not worth it.
A standard purchaser couldn’t get a mortgage on the property because of the short lease (67 years).
There was no margin for another investor to step in at the price Michael needed to achieve to get his money back.
Michael was hell-bent on making a profit so he tried to do as much of the refurbishment as possible himself. He kept trying to sell it at the top price to make a profit. This went on for 8 months.
Eventually, Michael got desperate and sold the flat to another investor for the same amount he’d originally paid at auction. He lost around £25k.
In all investments you’re going to make a mistake or two. Or three of four.
Warren Buffet famously said:
“Rule 1, don’t lose money. Rule 2, don’t forget rule 1.”
It’s the same in property investment. Mistakes will happen but never forget rule 1.
What COULD Michael have done here? Here’s a few ideas…
1. Sell to the freeholder.
2. Joint venture with a builder/investor.
3. Offer a ‘Purchase Option’ to investors.
4. Offer it to ‘Rent to Rent’ investors.
5. Take ‘Bridging Finance’.
Overall, Michael made a mistake here but not because of the property. He probably learned a lot from that but his mistake was that he clung onto the mistake for dear life, trying to salvage profit. I can’t argue with trying to make a profit but it went on for so long, any profit he might have made would end up being pointless compared to accepting the mistake, getting out without losing money and putting the money into a better deal.
One of the best pieces of advice I ever got in Property was from a very clever developer, Luke…
I was getting really annoyed about a property I wanted to buy and I was trying desperately to make it fit…
He said “It’s only a pile of bricks. There are loads more piles of bricks around”.
I’ll leave that with you.