"Price is what you pay and value is what you get"
~ Warren Buffett ~
Motivation Monday - Richard's Insight
This point came into mind around 3 times over this past week...the difference between price and value.
People that part with money to buy something often won't do so unless they get a value from the good or service of at least what it represents to them in return. Sometimes you can have an increased value need that leads to paying a higher price than at other times...think breakdown on a dark winter's night in a poorly lit area whilst alone versus being asked to buy breakdown insurance on a warm summer afternoon...when you have not broken down, as one such example. Clearly, getting the car repaired in the first situation will have more value to you and as such you will probably be prepared to pay more than when the chatty AA guy offered that discounted sign up discount months prior.
So, you get the picture right.
However, there are also some situations where you actually get more in value than the price on offer from the seller. I like these situations 🙂
A simple example might be still getting the breakdown insurance when the car breaks down on that winter night but still at the summer offer price rather the distressed and desperate price you may be dreading in a breakdown situation. I'm simply using the same example to illustrate the point.
In property, these situations may arise from time-to-time as well.
Has anyone ever tried to sell you time-share? If so, you might remember being put under intense pressure to buy it whilst on holiday or on a paid-for viewing trip right: why are they doing that? To increase their price that's why. But what about the value to you...is it a fair exchange? Don't worry about answering that 😉
How about if you see a property advertised below it's market value, where you know through your research that you could sell it tomorrow and make a profit...it has a higher value to you than another property at market value due to the profit potential, wouldn't you agree?
How about a property that is priced at market value (defined as what the average buyer would pay for it)...what value does that have to you? On the face of it, about the same as the next-door property at the same price right? But, what if by owning that property, it could generate a profit to you in a different way? For example, what if you could convert it int something else...say an HMO...and then achieve a higher rental figure than if you rented it as a single let property? The value will be higher to you than the person looking to buy it to rent it out as a single let. This actually means you could pay more for it than them too. Whether you do or don't pay more for it does change the value it has to you being higher than for the other person. But if you could still pay the same asking price as the investor looking to buy it as a single let, then you would probably be happy right? Of course you would as you will have received more in value than the market price suggests. Technically, you will also be creating value by doing the conversion, but let's save that discussion for another day!
However, that's the principle of price versus value...we should always evaluate the value of a purchase to us before we decide whether to pay the asking price or not. We should also not pay more in price than we receive back in value...and that often means taking a little time before we decide and negotiating the price...or sometime not as the case may be...think that through for a moment...
There is a reason why sellers of all guises present us with limited time to decide or an impulsive purchase opportunity...it creates higher value to THEM. We need to get good at creating a higher value to US instead.
That's it...get good at determining value and we will have a higher level of buyer satisfaction generally and a higher level of investment satisfaction specifically!