The Bawldguy is one of my favorites. Not just because he used to be an umpire, either. Jeff is one of my favorites because it is obvious that he “gets it,” and more importantly, he is very good at helping others “get it” too. I saw in my RSS reader his most recent post regarding what is technically known as the time-value of money concept. As always, he sums the idea up perfectly:
First — And don’t smirk — More is better than less.
More after tax profits. More after tax cash flow. If it has to do with return, maximize it one way or another.
Second — Sooner is better than later. Hey! I said no smirking.
It’s surprising how many folks don’t understand time’s place in real estate investment. Calling time a crucial factor is like saying water is wet. Neglecting time’s effect on your Plan and it’s execution is almost always injurious if not outright fatal.
Conclusion — The synergy between the two factors produce yet another Captain Obvious epiphany.
More — sooner — is much mo’ betta.
The idea that more money sooner is better forms the basis for all real estate investing. Heck, it forms the basis for all investing really, but it is especially important in real estate investing. In fact, it is the FIRST thing that you learn in the CCIM courses. This idea isn’t new. In fact, it is very old. I am sure you have heard the expression, “a bird in the hand is worth two in the bush.” That old axiom is a simple way of stating the same thing. The reason that the concept of “more is better sooner” is true is simple– the future is uncertain.
I get asked all the time about what I think a house might be worth in the future. As I tell people: if I could tell you how much this house would be worth in 3-5 years, you would have to try and find me on an exotic beach somewhere, because I would be making a lot more money. The fact is that no one can predict the future 100% of the time, so in order to hedge your bet, it is a good idea to take more money now, rather than hope that you have it later.
There is another reason that the concept is important to real estate investing– inflation. Quite literally, a dollar is worth more today than it is one year from now. So if you can take your money right now, and then invest it at a rate greater than inflation, you will always come out on top. If you wait for your money later, it has already lost some of its value, relative to today.
So, “more is better sooner” is a pillar of real estate investing, but what does it mean to the average homeowner without any real estate investments? The homeowner who is just selling their one house right now because they need to move. Adhering to “more is better” sooner can be the difference between success and failure for the average homeowner as well. This is true for the same reason it is true for the investor– the future is uncertain. Here’s an example:
You are selling your house. Your agent has it listed for $300,000. The home has been on the market for 45 days, not bad for the area, and it is receiving fairly regular showings. Finally, an offer comes in from some interested buyers. The offer comes in at $275,000. The terms are fairly standard, and the house should close in 30 days. You are able to negotiate back and forth and come to an impasse at $290,000. That is $10,000 below your asking price. You aren’t thrilled with the idea of having to take $10,000 less than your asking price, so what do you do?
Remember, more is better sooner. In this case, you have the option of $290,000 today, or NOTHING tomorrow. I know what you are going to say, “but the house is getting showings, and someone could come and make an offer for full price in a week.” Sure, or the house could sit on the market for another 45 days, by which point you will probably have to reduce your price. Remember, in a market such as our current one, there is no shortage of inventory. Buyers have options.
There is also the cost of carrying the house to be considered. With the current offer, you will only have 30 more days of carrying costs. That means only one more mortgage payment, and 30 days of utilities and maintenance. If you wait, chances are you will have to make at least one additional mortgage payment, and continue to have maintenance costs. This doesn’t even take in to account the psychological and emotional value of having your home sold, as opposed to continuing the process.
Now for those of you who are thinking, “are you telling me to give my house away?” No, that is not at all what I am telling you. What I am telling you is to remember that more is better sooner. The question you must answer is, “how much more?” If the offer in the example were for $275,000 perhaps the evaluation would be different. The idea of “more is better sooner” is simply a tool to help you evaluate your situation and what is in your best interests. I have seen owners squander deals over minimal amounts of money due to pride or foolishness or both, only to watch the home languish on the market to a point that the original deal would have been preferable.
Selling a home is an emotional process, and sometimes we need tools that help bring us back to reality and remember that while selling a home may be emotional, it doesn’t have to be irrational. The concept of the time-value of money, and that “more is better sooner,” is one of the tools that real estate investors use to evaluate investments; but it can be equally valuable to the average homeowner as well.
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