• April 8, 2016

baked-potatoes-58735_1920Putting aside the rare Chernobyl or Fukushima scenarios (or the more common and only slightly less horrifying Superfund scenarios), you can’t lose with real estate investments, right? You buy land and it ALWAYS has value. How can you lose?

To an inexperienced investor, real estate might seem like a high-stakes game of “hot potato.” You have a physical thing, an asset, a piece of “real property,” otherwise known as “land” (and the improvements to it, the mineral rights, the timber rights, air rights, etc.) (also hereinafter referred to as “a potato”). While it’s true that prices fluctuate, and no two parcels or potatoes are the same, very few needs for real property or potatoes are inextricably bound to a particular piece of property (or spud). And one can be comforted by the fact that a potato almost certainly has some value regardless of the particular use to which it will be put.  Under assumptions such as these, land is constantly bought and sold by the unwary as if it were a commodity, with winners and losers in every single swap.  Only time will tell who feasts on the Yukon Gold and who got burned by a hot potato. It is clear that some investors in real property fail to appreciate the risk involved.

The investment did not go as planned….At trial, when asked if the losses in the […] investment could have been caused by the collapsing real estate market, [Plaintiff] replied that he believed his investment should have been immune to market forces because he was led to believe that people would continue to go on vacations even when the economy deteriorated, and therefore his investment in vacation real estate should have continued to be cash-flow neutral, regardless of fluctuations in the economy…

The quote comes from a Minnesota Court of Appeals decision that issued this week upholding the trial court’s grant of judgment in favor of defendants in a failed real estate development deal. Any time that you think you have an investment “immune to market forces,” you might want to ask yourself why someone is selling you their goose that lays golden eggs rather than keeping it for themselves…

One thing that is impressive about the linked lawsuit is that two of the defendants in the case appear to have taken the risk to defend the cases against them without hiring lawyers. So, while plaintiffs took a risk on a land deal that failed, two of the defendants took a risk on a law deal that paid off.

Congratulations to Defendants Hyland and Ostigaard. Clearly your appetites for risk are heartier than mine.


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