Overcoming "Bad" Math...

Exactly one year ago today my partners and I were presented the opportunity to purchase 1/2 a block of row homes in Baltimore City. After much debate on price, we ultimately decided to meet the seller where he was and move forward.

In addition to the "profit motive", the challenge of taking on a half a city block was - thrilling.

Fast forward one year later, and as we race to complete the last three units in time for closing, our contractor shows up on our door step on Monday and informs us that he needs us to pay him for the "change order" work, which amounts to about an extra $25,000 per unit, including the ones that had already been sold!

Needless to say, I was "not happy", for a number of different reasons, on a number of different issues.

Yup, one year (to the day) later, the original seller is still in Vegas, the lender is happy, our buyers are ecstatic, the private lenders are in "heaven", the contractor is satisfied, and my partner and I are looking at each other wondering how in the heck we wound up working for FREE (on this project) over the past year.

After spending the last three days yelling and screaming at everyone (an adult version of an extended temper tantrum), I finally sat down last night and did a "post-mortem" and realized I had become this week's poster child for "Bad" Math.

A year ago when we had the opportunity to close the deal, my business partner and I looked at the opportunity and concluded that with the work and time involved, the maximum we should pay per unit was $20,000 (very old houses, a ton of work, transitional neighborhood). However, after much discussion on "how this would look on our resume", the "coolness of these old brownstones", "we got time to take this on...", we convinced ourselves to meet the seller at his price and pay $42,000 per unit.

Sure enough, even after "beating up" on the contractor, one year later we are shelling out an additional $20,000 per unit, and this time the marketplace is not standing there waiting to "bail us out".

In short, we talked ourselves into doing the deal and overpaid by $20,000 per unit and that decision is now chewing a hole, past our back pockets and into meat. How did we get there...? ->BAD MATH.

We had a very good feel for what the numbers would be, and we should have held our ground at acquisition, or simply walked. Instead, we talked ourselves into believing that the time frames would be shorter and the costs lower. In short, we used: "Bad" Math to justify moving forward.

So, now at the end of the project how do you overcome "Bad" math...?

At the End of a Project - YOU DONT!

LESSON #1 OF REHABBING (And Development):
YOU MAKE YOUR MONEY IN THIS BUSINESS WHEN YOU BUY, AND YOU LOSE IT WHEN THE CONTRACTOR SHOWS UP.

I will be hanging this right under the copy of this week's "Tuition Payment" (a copy of the Contractor's last bill/change order)
on my wall later today.