Now I’m not talking about the student or the guy with four kids, a mortgage and $98 in savings. I’m talking about the majority of people. It’s a phenomena that translates into real estate investment on a huge scale. But first, let’s look at what I call the 4&162; savings logic.
15 gallons results in a savings of 60&162;. If the average person fills up their tank every 10 days or so, that’s a whole buck-eighty a month as Grandpa used to say. In a year that’s a savings of less than $22. And that’s why they would waste time looking for that 4&162; savings?
Think about how people do this in so many areas of their lives. They’re like the blind man who only touches the elephant’s trunk and concludes it’s snake-like. Situational awareness combined with rational thinking and the long view, will almost always produce better results than behaving as if you’re blind.
Yet that’s how a surprising number of people consistently make their decisions when finances are involved. It never ceases to amaze me. Real estate investors often think this way, costing themselves hundreds of thousands of dollars — sometimes millions.
Here’s an example.
Cher and John are clients of mine, and are very successful investors. They were very quick learners. As a matter of fact Cher is sought by investors all over for her new found expertise in property management principles.
About three years ago I told them it was time to not only exchange out of four of their San Diego properties, but that they should take their net proceeds to the Phoenix area. They were fine with that. I also gave them the same speech I gave them before we embarked on their last exchange.
Don’t focus on how much you get for your properties as long as it’s in the reasonable range of value. Whether in fact you could have held out for another $10K on that triplex is a good conversation to have at Starbucks with your $5 cup of Venti Whatever and a cookie. Otherwise, as I tell my clients, “You won’t be able to find that 10 grand in the next five years. Why do you care? Keep your eye on the right ball — a successful exchange resulting in coming significantly closer to your dream retirement. The rest is wasted calories.”
We sold all four of those properties relatively quickly. And even I would not argue the sales prices couldn’t have been marginally higher. But the results of that exchange were, with 20/20 hindsight, magnificent. Even better than we’d hoped for. In a couple months that group of 11 income properties is about to produce monthly cash flow greater than the additional amount we might have gotten on the San Diego properties.
Now talk to me how ‘we coulda got another 2%’ on one property or another. Only in this scenario you’re not just wasting your time saving $22 a year. You’re potentially missing out on tremendous opportunities to improve your financial condition dramatically. Cher and John are now about to benefit from monthly cash flow exceeding that silly little 2% they may or may not have been able to hold out for.
Ask them today about the 1-2% price differential compared with the ability to sell all four properties in the same time frame, close them give or take simultaneously, and successfully close 11 Phoenix income properties. They’ll laugh out loud. It’s like making a million dollars a year and worrying about who’s picking up the check for dinner at the local taco shop.
Keeping your eye on the right ball will save you from horribly wrong-headed decisions. Over the next 20 years or so, Cher’s and John’s decision will have resulted in $1.5-2.5Mil in cash flow. Do you honestly think the extra 10 grand on the sale of one of their properties would have made any kind of measurable difference?
Of course not — it’s a silly question on its face.
If it’s time for you to take the next step and exchange your properties, ask yourself if you’re willing to walk away from a sale that’s only 1-2% short of your idea of value. If you can accomplish the ultimate goal of the exchange with what’s on the table, going to war for some ethereal and false principle is self-sabotage of the most destructive kind.
Ten years down the road you no doubt will have have rationalized your decision, but you’ll know you screwed up big time.
Don’t be your own worst enemy.
Brian Brady says:
The velocity of money and opportunity costs explained in easy to understand terms, Jeff.
It’s like trying to squeeze that last little bit of juice out of an orange in the middle of an orange grove
April 2, 2007 — 10:37 am
Jeff Brown says:
>It’s like trying to squeeze that last little bit of juice out of an orange in the middle of an orange grove
OK, that’s the last straw. Today I’m going to start a Word doc chronicling all the cool things you and the rest of the real estate world pass on.
That’s a great quote.
It reminds me of what my biz manager said to me a while back. I was wondering what or who caused a particular problem I was trying to solve. She said, “Jeff, when the canoe is a minute from going over the waterfall, it’s not the time to figure out exactly who lost the oar.”
Perfect.
April 2, 2007 — 10:44 am
Austin Realtor\'s Wife says:
Jeff, great post! This is applicable to most any buy/sell situation (the 4 cents savings logic), not just investing. In a first home buyer market (which is HOT here in Austin by the way), the occasional buyer has searched the MLS for months (which makes them licensed, right?) and squawks over the $1,000 more they want taken off the sales price (or they’ll walk right now!) which equates to a few cents each month- are you kidding me?
I don’t claim to be a financial specialist (you know I hit Starbuck’s for $8 a pop every day), but you’re right- why go to gasbuddy.com or coolcoupons.com when you can look at what investments you do (OR DON’T) have right now that could be your extra 60 cents! 🙂
Sorry no extra OJ or canoe quotes, I stole yours instead!
April 2, 2007 — 11:16 am
Jeff Brown says:
You’re gonna be the real estate world’s ‘other’ wife. 🙂
People, go see her new blog. It’s fresh, with viewpoints only our wives would think of. As a matter of fact, send your wives to her site. They’ll thank you.
April 2, 2007 — 11:28 am
Chris says:
I beleive you need to keep an eye on the big picture, a lot of investors seem to focus to much on the little stuff that can mess you up.
I have a good one:
My aunt was working as a buyers agent with a couple, and they decided to write an offer on a house. The seller accepted, and now it was time for the inspection, everything is going fine. The inspecter found a few minor issues, about $5k worth of stuff. The seller, because he was just about the nicest person you could want to deal with, said no problem I’ll fix it all. The buyers didn’t even have to ask him, he just said it would all be taken care of. Great right? Sounds like a dream seller! Well my aunt’s clients all of a sudden decided the seller wasn’t honest, because he wanted to fix everything. They backed out! That was the final straw my aunt decided to stop working with them right after that.
Amazing!
April 2, 2007 — 3:48 pm
Jeff Brown says:
Chris – You can’t make up that kind of story. 🙂
The common thread I have found is the problem people are afraid the other guy will behave as they would. That’s scares them to death. 🙂
April 2, 2007 — 6:13 pm
Mark Robinson says:
Hi Jeff –
Great comments regarding the consumers that are more than willing to stand in line at Starbuck’s (not me!) for their morning AND afternoon jolt, but will go to the grocery store the same day to use the coupon they found in that morning’s paper for 50 cents off a pound of Folger’s coffee! Hmmm, whatever. That whole “perceived value” deal is quite powerful, isn’t it?
Mark Robinson
April 21, 2007 — 8:19 am
Jeff Brown says:
The real irony is their perception becomes their reality. Sometimes tragically so.
April 21, 2007 — 9:47 pm