Throwing good money after bad…

I have heard this saying many times over the years and while I understand it, I experienced such a clear example of the principal today that it deserves everyone paying attention to the concept, especially in todays meltdown economy.

I had a potential client discuss his real estate holdings which are massively underwater, with mortgages worth twice what the property is worth. Worse yet the property is yielding revenues inadequate to even support half the mortgage debt service let alone other normal overhead items. The owner is paying the overhead, insurance and mortgage note debt service mostly out of pocket without expectation of a return on his investment.

He should either engage in a very short sale and walk away or at the very least stop payment on the mortgages and engage in a workout with the bank as perhaps a viable resolution can be engineered.

His position was he cannot stop paying the mortgage as he has over a million of his own cash in it and he does not want to lose it. He does not understand he is throwing good money after bad…

What he fails to accept is that  he already has lost it. He continues to lose more every day as he pays mortgage notes that represent far more then the value of the real estate and far more then it throws of,  thus he is in essence throwing good money after bad.

The bad money is already spent, nothing he can do about it. The good money is not yet spent and thus a decision can be made whether or or not he should spend it. Its good because it remains in his control, awaiting the rightt decison a decision that will return a profit.

There comes a point in any investment when this decision must be made. When the arithmetic no longer makes sense, when the values are not there, when the property is so upside down or so unable to return a profit to the investor, we would then throwing  good money after bad has already been spent and lost.

At some time it is appropriate to take the loss and walk away, spending the good money on good investments that can provide a return and not protecting bad money already spent that has no possibility of returning anything at all.

Its is called taking the emotion out of the investment formula. Not crying over spilt milk and investing in properties that return a profit as opposed to protecting investments already made that are losers.

Good money after bad…not a good idea. Stop doing this today.