Making Lemonade


No fewer than three times in the past week I heard someone use the expression “when life hands you a lemon, make lemonade.” Twice it was used in the context of real estate and the other in reference to the economy in general. What that says to me is that people have, for the most part, come to the realization that things will never return to the way they were.

image via Flikr

image via Flikr

 Last week I discussed revisiting your business plan, getting back to basics, and remembering why you went into this business in the first place (article). Often that is easier said than done. Everyone understands that there are going to be setbacks, or lemons, along the way. But now it seems as if the lemon harvest has been a bumper crop. How much lemonade can we drink?

The Carnegie Solution

I remember reading a book by Dale Carnegie many years ago. He had a dale-carnegiefairly simple process for dealing with problems and it’s one that I’ve always remembered. He suggested following three simple steps:

  1. Determine the worst possible outcome
  2. Accept that outcome if necessary
  3. Take steps to improve on the worst case

People have a tendency to let things get out of hand by ignoring problems altogether. The worry and stress impacts every area of your life including your business, family life and your health. Stress takes an enormous toll and there is certainly no shortage of it today.

Facing Trouble Head On

Let’s look at a typical problem facing real estate investors. Tyler Tycoon gets caught up in the buying frenzy of a few years ago. He purchases an investment property in 2005 using an Option ARM and very little money down. He rents the property for enough to cover the teaser rate on the loan with very little left over to cover other expenses. He isn’t worried because prices are appreciating rapidly and he was assured that he would easily be able to refinance into a better loan before the teaser rate resets and caused the payments to jump by 50%. What could go wrong?

It’s now 2009 and prices have dropped significantly from the purchase price. Worse yet, the teaser rate is about to reset to a rate that will cause the payment to jump to a point that puts the payment much higher than the rental income, never mind the other expenses. Tyler has no reserves and is faced with foreclosure and is considering just walking away from the property.

Using the three step process:

  1. The worst case is that he loses the home to foreclosure and the lender obtains a deficiency judgement forcing him to declare bankruptcy. His credit is now ruined for ten years as a result of the bankruptcy.
  2. Instead of worrying about it, accept that this could very well happen and mentally prepare for it.
  3. Look for ways that will improve the situation. You may not be able to solve the problem but you may be able to lessen the impact. Perhaps a short sale or modification of the loan or a deed in lieu of foreclosure with an agreement that there will be no deficiency judgement.

Ignoring problems won’t make them go away but it can make them worse. Those who prefer to cry over spilt milk will, no doubt, be signing the blues for a long time to come. Those who choose to make lemonade out of life’s lemons will wind up whistling a happier tune.

When we have accepted the worst, we have nothing more to lose. And that automatically means- we have everything to gain!” – Dale Carnegie

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  1. I definitely agree with you on the issue of accepting the worst case scenario and working to prevent it as much as possible. Too often, borrowers assume the worst case and then go straight into avoidance and denial. They ignore phone calls, wait and hope for the best, and do not take steps to address their finances. All of which makes it more likely that their lender will foreclose and seek a deficiency judgment.

  2. I used the Lemonande analogy on a blog post of mine. “Does Anybody Want a Free Glass of Lemonade” I showed a picture of a boy without money looking for a free glass of lemonade. I tried to draw the analogy the this boy is like the american public when they ask the bank for an IOU on their Mortgage. I said the boy will drink the lemonade and forget they have to pay for the drink and the public will get a Mortgage Forebearance and forget they have to pay this money back to the bank.

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