My friend is facing an interesting dilemma and I’ve been thinking about it for a while. I finally decided to write it out as a blog post just to get it out of my brain and because I sometimes do a bit of my best thinking while writing. I guess that’s a bit of a warning that there may not be a cathartic conclusion at the end of this post. If you have any thoughts, I’d love to hear them. Just add them in the comments.
Here’s the situation: My friend is selling his house because he’s moving to another city for a new job. The housing market in Winnipeg is strong and his house looks good (particularly after some renovations) so we know his house will sell.
Here’s the dilemma: He was going to list his house on the market but he was recently offered a price for his house from a buyer prior to listing. Should he take the sure thing or should he gamble on the market?
The “sure thing” price is pretty fair and about what his asking price was going to be. It’s about in line with what other similar houses are listing for. But the gamble is also an option because the housing market in Winnipeg is a little weird right now and it’s not out of the question to have someone bid higher than the asking price. (Note: I’m not going to reveal the prices here on my blog to protect his privacy but also because I realized that the price itself doesn’t really matter. The same ideas would hold true for other price points as well).
So when he posed this dilemma to a group of friends at a pub a couple of weeks ago and the table was divided. We were each adamant that we were correct and the other person was making a mistake. I said he needed to take the “sure thing” price and others said he needed to gamble and put his house on the market because his house might sell for more.
So here’s why I said he should take the sure thing price. Actually, I’m going to draw it on the following graph, which shows the price and possibilities (or price differentials might be a more boring way to write it)…
Here’s what could happen if he put his house on the market. The house could sell for a lower price or a higher price. (Theoretically the line could go right to zero and could go substantially higher but the line below represents the likely sale price scenarios:
Here’s what could happen if he sold his house to the buyer without actually listing it. The house would sell for a fixed price:
Putting them both on the same graph to compare them, you get the following:
There’s another price that I think is useful to know. It’s the price he bought the house for. And again, since I’m not displaying actual numbers here, the line represents his initial purchase price. Regardless of what he sells his house for, he’s going to generate some capital gain from the sale — whether he sells with the sure thing or by listing his house.
The gamblers said that he should list his house because it was likely that he would earn a profit above his sure thing price. They felt that the money he could make above his sure thing price was going to be additional profit. They asserted that my friend was giving up a potential additional gain by going with the sure thing. They admitted that there was a possibility that the price could come in below his sure thing price but felt that the reward of the gain was worth the risk of the loss.
I, on the other hand, felt that the sure thing was the better choice. And the reason I felt this was because my friend is moving to another city and he’s starting his new job soon and has to also move with his wife and their young child. If he listed his house, he would have to commute back to Winnipeg to work on his house, and then go through the hassle of listing, showing, signing papers, etc., all while making the lengthy and expensive commute… and all while starting a new job.
On the other hand, the problems and headaches are immediately eliminated by selling now for his sure thing price. I asserted that the loss of that additional potential gain was the cost of the peace of mind that he would have to take care of that major stressor in his life. Although there was a potential gain, I argued that the gain wasn’t worth the amount of effort involved. Selling his house with the sure thing model was zero effort, zero additional cost, zero additional stress, zero additional commuting. Selling his house with the gamble would bring in potentially extra money but would cost in other ways.
Reflection: I called one a “sure thing” and the other a “gamble”. But in reality, both are gambles, aren’t there? By listing the house, my friend is gambling that the market will pay more than the fixed price he was offered. By taking the sure thing, my friend was gambling that the fixed price would not only be higher than one potential outcome of the market but also would be more rewarding because it would minimize the effort required to list his house.
I’ve tagged this post as a business, finance, and real estate post because it really does connect to all three. In fact, I can think of scenarios in the world of business and in the capital markets where this issue is a regular dilemma. And although it’s tempting to chase the highest dollar value as the most obvious answer, I don’t think that’s always the best answer. After all, there are costs and intangible rewards that could potentially be worth more than money.
What are your thoughts?
(Oh, and in case you’re wondering which one my friend chose, I don’t know yet. Last time I asked him, he hadn’t decided).