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Robert Hohenberger
Robert Hohenberger
Robert Hohenberger
Robert Hohenberger
Robert Hohenberger
Robert Hohenberger
United States Army
Robert Hohenberger
36th Infantry Division
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Article
How Much Can You Afford to Lose?
Author: Robert Hohenberger
Sam was ahead of his time. He hired me in 1956 when he had just bought an army surplus housing project in San Antonio that contained over 80 duplexes, 50 single family homes, 18 vacant lots, and an administration building. His goal was to make improvements in the existing structures and sell everything for a huge profit.
Just as would-be real estate wizards today learn, things do not always work out as planned. When he couldn't get the zoning changes he needed, he sold the existing units to low-income families. He sold the administration building to a church, but he could not find buyers for the empty lots.
One day Sam asked me if we could build FHA or VA homes on the 18 lots. I learned that the VA would guarantee home loans on houses under $10,000, which back in those days would build a pretty nice house. We hired an architect, got VA certificates of reasonable value, and got bids from contractors. The houses appraised at $9,950, which included $750 for the lot. I estimated we would make $1,000 per house. I was rather proud of myself for turning Sam's sow's ear into a silk purse.
When all the bids were in, Sam had me review the costs, and then asked, "How much can we lose?"
"Honestly, Sam," I told him, "We can't lose money. We are going to make money." But to placate him, I redid my figures. I told Sam that by the farthest stretch of my imagination, we might lose $500 per house or $9,000.
A couple of days later, he came back and asked some more "what if" questions. I tried again. This time I came up with a loss of $800 per house or $14,400 total. Later, he asked me for a third time for a loss estimate.
"Bob, be really conservative on profits and liberal on losses," he told me.
I almost lost it at this point, but I did what he said and discovered that if something improbable - like an earthquake - happened, we could lose $1,000 per house for a total of $18,000.
Then Sam dropped a bomb by saying, "I can afford to lose $18,000, so let's go."
With that much possible loss at stake, I negotiated even harder to get good deals on materials and contracting with subs. But we still needed construction money. One Savings and Loan agreed to make us construction loans in order to get our mortgage business. When they asked Sam to personally guarantee the construction loans, he declined because he had seen people go bankrupt during the Great Depression from making personal guarantees for corporate obligations. Sam finally got them to agree that they could not lose more than $1,000 per house. He then offered to put $18,000 in a savings account as additional security for the construction loans. That clinched the deal. The Savings and Loan was delighted to get the mortgages on the homes and Sam had the construction loan he needed with the terms he wanted. Ultimately, the houses sold before any were completed, and due to lower interest costs, we made $1090 per house profit.
Sam later told me that the reason he kept asking about losses was not because he did not trust my numbers. He wanted me to look at other possibilities.
"Most people go into a business venture only expecting to make a profit," he told me. "They never consider they could lose money. I always take my loss first. Then I can concentrate on making a profit."
Because he made me think through the entire process, recognizing that loss was a possibility, we knew the challenges we faced and approached the venture aware of the pitfalls as well as the profits. The decisions Sam made as a result of knowing the downside, made the upside all that sweeter.
Sam died a few months later, but I still remember the valuable lessons I learned from him. Even today, before making any investment I always ask myself how much I can afford to lose. Then, if I can live with that number, I go with the project and work twice as hard to make a profit.