What do "sunk costs" refer to in real estate?

Sunk costs in real estate refer to expenses that have already been incurred and cannot be recovered. This concept is critical in decision-making, as these costs should not influence future decisions since they are lost and cannot be altered regardless of future outcomes.

For instance, if a developer has spent a significant amount on obtaining permits or conducting feasibility studies for a project, those costs remain the same whether the project goes forward or not. Investors and developers need to focus on the future potential of the investment rather than dwelling on past expenditures, which are considered sunk costs. This understanding aids in making rational choices about future investments and project viability without bias from previously lost money.

This concept aids stakeholders in evaluating their options without emotional attachment to past spending, ensuring that their decisions are based on potential future benefits rather than irrecoverable losses.