If I told you that property investment has the potential to completely destroy lives, what would you think?
Picture the scene: it’s 2008, I’ve just relocated to Spain and I’m taking a dip in the lovely swimming pool in my brand new villa. I’ve just signed a huge 40 million euro commercial property deal that’s going to make me tens of millions and I’m on top of the world.
Just three years later I would be staring at a personal net worth statement of negative 15 million value on it, the banks were forcing me to sell my family home and my marriage had come to an end.
Would you be so enthusiastic then to enter the exciting world of property investment?
On my podcast and blog, it would be easy enough for me to only focus on my successes and best deals, where I made the most money in the shortest period of time, but I think it’s important to balance things out to show people that a career in real estate and property development isn’t always plain sailing.
So over the next two weeks I’m going to share the stories of two of my worst deals, that cost me an absolute fortune. Every success story has to be tempered with the reality that some deals go wrong, after all.
There can be circumstances where a deal might fall through or the market turns against you: often when it does, there’s very little warning, or even if there is, everyone in the market sees the issue at the same time so there’s nobody to sell your asset to.
This is when the debts you’ve secured against your assets (which may have been something of an advantage previously) can become a weapon of mass destruction and could see you losing all your capital.
So let’s get into the first deal, and see what went wrong.
Deal No. 1 – Dublin
This was a relatively small deal but still a great lesson learned.
It was a property in Dublin which I bought with a business partner. It was a new development with a retail until on the ground floor; we agreed to buy it for 500k, and we already had a tenant lined up, with terms agreed that would have made us a nice profit. We assumed this deal was a no-brainer, and that should have been our first red flag – in fact my business partner and I agreed that if either of us ever used the phrase ‘no-brainer’ again, we were allowed to beat the other up, after what we experienced in this deal!
So, we had this tenant lined up and had an outline agreement of rent, subject to a formal lease being signed, which (all things considered) would have made us around a 600k profit. We’d not put any money in ourselves and instead had borrowed the entire 500k purchase price from the bank.
Now, in an ideal world you would make sure the tenant had signed the lease before closing the deal… but we don’t live in a perfect world. In our case, the vendor was having none of the delays at our end and said that if we didn’t close the deal by the end of the week, he was pulling it.
Although we didn’t have the agreement signed with the tenant we were confident that it was all going ahead: the tenant said they were committed, our legal teams were working on the lease agreement and they had started work on the store fit out, so we closed the sale, and thought about how to spend our 600k profit.
Which is when we got a call from our solicitor saying the tenant just returned the lease contracts unsigned with a letter saying that regretfully they must withdraw from the deal.
It turned out that their competitor had a leased a unit a few doors down, wrecking their financial projections for the performance of the store: suddenly the 80k per year rent they’d committed to didn’t seem like such a great idea.
It was panic stations as you can imagine – we offered to reduce the rent, and when they didn’t go for that, we talked to our solicitor about taking legal action. That’s always a last resort, because you might want to work with people in the future, but we felt like our backs were against the wall. Of course, because they hadn’t signed a lease, there was no case.
The fact that they had been in fitting out the unit didn’t mean anything, and I could go on and on here telling you what we did to try and find a new tenant, but the long and the short of it is that 12 years later we exited from that deal at a loss, after the unit had effectively sat empty for 12 years.
So what lessons did we take away from that situation?
Lesson 1 – Never call it a no-brainer
I ever hear the phrase ‘no-brainer’ again I’m going to run a mile! Always do your due diligence and never take something at face value… if a deal seems too good to be true, that’s usually because it is!
Lesson 2 – Never assume a deal is done
Until you have a signed contract in your hand, your deal is not done, even if a builder has started working on a fit out. Never, ever take someone’s word for something, the deal is only complete when it’s on paper and fully executed.
Lesson 3 – Don’t let the profits blind you
We let the potential profits cloud our judgement on this deal. We hadn’t properly thought through an exit strategy and when the vendor threatened to pull the deal, all we say was someone taking away our profit.
The Dublin deal was definitely a painful lesson, but nothing compared to the next one, which I’ll talk about next week and goes to show that it doesn’t matter how experienced you are, things can still go wrong… but you need to be sure you know what you’re doing.
With that in mind, it feels like an excellent time to mention my new course Foundations, which kicks off on 1st June. It’s an entry-level training course, carefully crafted for novice investors or indeed anyone simply looking buy their first home, and is designed to mentor and guide you through the process, and basics of investing in the property market.
We know that entering the property market for the first time can be a daunting experience and this course will take you through the fundamentals in simple, jargon-free language. It explains how the market functions, what you need to watch out for, and steps to help you avoid costly mistakes.
We’ve got a special offer for Early Birds so don’t miss out – book your place today!