Today, as I was listening to the audio version of the book Killing Sacred Cows, by Garrett Gunderson, I was struck by an idea the author mention in the book. It was such a fresh and different–but obvious–perspective that it kept my philosophical mind occupied for hours, thinking about this basic principle of economics. Here’s the gist of the idea:
A transaction only happens when two people disagree on value.
The reason is that value is relative, and subjective for each person. What I value highly, you may not value at all. Some people would pay $500 for a collectible pair of sneakers, while others wouldn’t want that exact same pair if they were free. Football fans may be willing to pay thousands of dollars for a ticket to the big game, while a casual football fan may only be willing to spend $50 to catch the game.
Here’s a real estate investing example to illustrate the point.
Let’s say I’m selling a property for $500,000. You come along and decide you are willing to pay $500,000 for the property, so we write up a purchase and sale agreement for $500,000. That means we both agree the value of the property is $500,000, right?
In actuality, I think it’s worth less than $500,000, and you think it’s worth more than $500,000. Let’s look at it this way:
I have the property, and I’m willing to trade that property for $500,000. That means I value the $500,000 more than I value the property (or, stated otherwise, I value the property less than the cash I could get).
You, on the other hand, are willing to trade your $500,000 for the property–you would rather have the property than the cash; to you, the property is more valuable than the cash.
All transactions–big or small–are like this. Neither of us would trade what we have for something else unless we felt like the other thing was more valuable than what we already had–this is how the basic premise of self-interest shows up in economics.
So in other words: it’s only when two people disagree on value, that a deal made. We have to disagree on value in order to come to agreement on the transaction.
Disagree to agree.
As a real estate entrepreneur, it’s our job to understand exactly what it is that the owner/seller of a property values more than their current property. It may be freedom, it may be a new home elsewhere, it may simply be peace of mind, or a million other things. But whatever it is, it’s our job to find it, and then craft a proposal that gives them what it is they value more than their property–while making sure the property we are getting is something we ourselves value more than the money or other resources we are going to trade for it.
I hope you find this little nugget of entrepreneurial philosophy as thought-provoking as I do!