Too Good to Be True

On rare occasions in your investing life, an opportunity seems too good. What is the real reason this real estate sells for this discounted price? Why is this stock so cheap?

You start to dig down deeply into the situation to find the real faults with the opportunity. The land underneath that building must have nuclear waste in it. The building must have been built incorrectly. The primary tenant in the building is about to leave.

Some years ago, I was offered a building for about 50% below what I thought the actual value was. It was an incredible opportunity. I didn’t have any money. I couldn’t have put any money down, so the owner offered it to me for purchase by just taking over the mortgage.

This was too good to be true. My head was racing. Where is the nuclear waste?

I started my due diligence and couldn’t find anything wrong with the building, the land, or the offer.

I took the deal.

In closing, I was surprised to learn that the purchase included another parcel of land close to the building. I sold that immediately, pocketing some $20,000. All I had to do was sign the papers and take possession. No cash is required.

I had zero invested, calculated positive monthly cash flow, and within ten years sold the building for twice what I had “paid.” It was true—a great deal.

I learned from this and many others since that, on occasion, excellent opportunities come to us. Instead of discounting them as too good to be true, I roll up my sleeves and get to work. I try to find something wrong with those deals.

I take extra time to contact anyone who can help me find the nuclear waste. 

I found a residential property selling for a deep discount a year ago. The home had been ignored and unoccupied for over seven years. Mice and raccoons were the only residents.

But here is the deal. The home sat cut into a mountain overlooking the ocean. It was built by an outstanding contractor and designed by an architect from Toronto. It was on the market for about a year with no takers.

It was selling for approximately 60% of what I calculated to be the value. Upon inspection, I learned that roughly $100,000 in renovations would put the home in incredible condition. We purchased the house for $550,000 and put in the upgrades, meaning the cost was $650,000 in total. A year later, the home is worth some 1.2 million dollars.

As part of my effort to discount the “too good to be true” pounding in my head, I tracked down the contractor who built the house some 30 years earlier and had him tour the home with us. I also inspected it and looked at the history, land elevations from the ocean, and any other hidden problem I could think of. I had a consultant research zoning and potential uses for the 3.8 acres.

We could sever two other lots from the property that would bring in some $250,000 at today’s market rates.

So, in the end, this deal happened because we didn’t listen to our brain telling us to walk. After all, it was true.

How often have you walked away from a great deal or opportunity because you couldn’t trust your skills in digging to find the truth?

When a door opens and a great deal comes your way, you must do the deep work to investigate the truth of the opportunity. Only so many great deals come to us in a lifetime. When one knocks on your door, ensure you have a system and team to help you determine if it is too good to be true.

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