R.E. Investor Hesitates to Back Out of Deal to Save Sunk Costs

[Corey Dutton]

There’s a term in business and investing known as a, “sunk cost.” When entering into a real estate acquisition, an example of a sunk cost could be money spent on inspections or on other due diligence, time spent in analyzing the property, etc. These are all examples of sunk costs. The rule with sunk costs is: Never throw good money after bad money.

Recently, a past client that we’ve funded deals for before came to us with a new real estate acquisition. After we analyzed the value, we discovered a property that had recently sold, located only a stones throw from the subject property. This newly discovered comparable sold far below where the real estate investor intended on reselling the property. We provided the real estate investor with this newly discovered value information. With much pain and deliberation, he tried to decide if he should proceed with the acquisition anyway. But why should he? He already spent a ton of time and money on the due diligence. But what if he doesn’t make money on the deal?

All of the monies spent to date on the deal are sunk costs. And what is the rule with sunk costs? Never throw good money after bad money. If this real estate investor decided to proceed anyway, he would not make money, or worse, lose money trying to save his sunk costs. When acquiring real estate, your due diligence is considered a sunk cost if it reveals that the deal is not as sweet as it looked before. Never throw good money after bad money on a real estate acquisition!

[Corey Dutton]

Thanks Scott S., totally agree. Especially when another deal is not in sight.