Proficient Note Buyers
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June 01, 2011
Relative Value
While surfing through the endless drivel that is cable television these days, I happened upon a show called "Pawn Stars" the other night. I had heard of the show, but didn't really know what it was all about. Turns out it profiles a guy who owns a pawn shop in Las Vegas.

At the point my wandering thumb stopped for those brief seconds to see what was going on, the owner of the pawn shop was in a price negotiation with a guy who was trying to sell a fighter pilot's G-suit. The subject of the negotiation wasn't what caught my eye, however; it was the way this pawn shop guy (I think his name was Rick) negotiated.

He started off by asking the seller how much he wanted for it. The seller (in this case and every other situation I viewed over the half hour show) had a number in mind, but it was always far more than Rick was thinking. In each instance, Rick's number was usually less than half the asking price, and the deal was usually consummated not far north of Rick's starting point. In other words, the seller would make big jumps downward, Rick would make small jumps upward. In only one instance did the seller decide he was better off keeping his item than taking Rick's final offer.

Earlier today my business partner Matt was recounting a conversation he had with a neighbor of a property we own in the northeast. Our property is filled with the former owner's clutter, the yard is overgrown, and the whole place is in serious need of a deep-clean. The neighbor's property is nicely-kept, but has a common wall with our property. In other words, the exteriors of both properties are essentially the same.

As Matt was trying to figure out what we wanted to do with the property, the neighbor mentioned she might be willing to pay in the $10,000 to $12,000 range for the property. Since we feel the property is worth at least twice that, Matt turned the tables and asked the seller if she would be willing to sell her house to us for the price she just offered for ours. Taken aback, she sputtered something about how her house was immaculate inside and well taken care of, and was worth far more than ours.

"How much more?", asked Matt. "You can't even compare the two", was her answer. Now, Matt is a former appraiser, and knows the value of pretty much all things real estate-related. "How much more?", he asked again. "I wouldn't sell my house for less than $70,000", she replied.

Matt continued on: "So if I were to spend $10,000 fixing this house up to look exactly like yours, inside and out, are you saying it would be worth somewhere around $70,000? And if so, would you pay $70,000 for it? If so, I'll have the contractor start work tomorrow. If not, then how much is your house REALLY worth?"

To this, she said something about it taking far more than $10,000 to bring our house up to her standards, and Matt decided to stop harassing the poor woman. The back-and-forth with the neighbor illustrated this, however: PERCEPTION and REALITY are often confused when dealing with any item that has emotional value.

Think about it: That laptop you spent $1,500 on a year ago is probably only worth half that today. Unless you were desperate for the money, however, you'd never consider selling it for so much less than you paid. Or let's look at this house of ours: If we were desperate to sell it, maybe we would have jumped at the $10,000 offer. We're not, so we didn't.

Looking back at our friend Rick, the pawn shop guy: As a viewer, it's pretty easy to tell who is going to sell and who won't, regardless of Rick's offer. The guy who needs the money is going to sell, and the guy who doesn't won't. Simple as that.

I see it every day in our business; banks, mortgage companies, and even individuals who have finally realized their perception of value has only dug the whole they're in even deeper. Their only escape? Face the facts, understand the true value of their asset, and pull the trigger if the offer is anywhere close.

Of course, if the local market where our property is located continues to lose value, you just might see us on Rick's next episode, trying to pawn off our house!

Make it a great week,

Clint


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