Knowing when to Hold them and when to Sell them

December 2017

Howdy readers! Hopefully you all survived the madness that is Black Friday. It's amazing, but many retailers think that the only way to attract customers is to cut prices to the bone. Fortunately, we know that there are so many other options...

Pricing Question from a Reader

I'm a partner in a local [service business] and we've decided to move closer to the center of the city. This will allow for more interaction with our core customers and reduce commutes for our employees. We've received a low bid for our existing place, and our real estate agent is telling us to take it. Should we?

Well, I don't know how low this "low bid" is, or what your market looks like, but I'll tell you this: you need to think about more than just the sales price.

Here are three factors that are worth analyzing:

  • Shifts in customer demand
  • Holding costs
  • Risk tolerance

Yes, all things being equal (and they never are), selling for more money is better than selling for less. The book Freakonomics points out that real estate agents tend to push for quick sales, because that's how they are incentivized.

That said, holding out for a higher offer may involve some degree of risk. Sometimes the demand for assets (like buildings) slump unexpectedly. While firms with strong finances can weather temporary storms, sometimes asset prices never recover. There are countless malls and industrial centers that were once booming, but are now sitting vacant and forgotten. Many would have fetched a pretty penny in their prime but are now worth pennies on the dollar.

As one of my friends in the real estate game used to say, "buildings eat." What he meant is that real buildings are unlike other financial instruments, because they require a constant flow of additional investment. Repairs have to be made and taxes have to be paid. Other items like heat, air conditioning, fumigation, and electricity will also continue to put a dent into the budget of any real estate owner.

Holding on to a building might cause a firm to become the equivalent of "house poor." Should the business' cash flow become impaired, or access to liquidity dry up, it may be forced into selling in a down market - or even into bankruptcy.

Even if a lessee can be found, the owner will still need to worry about damage, wear and tear, and even the risk that the lessee will go bust, or simply stop paying altogether.

I will be the first to admit that I have a bias against real estate as an investment class. Nevertheless, fortunes have been made over parcels of land and the buildings that sit atop them.

Given my lack of knowledge about your personal case, my advice is to really think about the points raised and to realize that investment isn't just a matter of expected return. Risk and holding costs must always be considered.

Questions come from readers like you. If you'd like your questions answered, send them my way.

♫This Q&A and many others are now available on the Pricing After Dark podcast.

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"A good film is when the price of the dinner, the theatre admission and the babysitter were worth it." -- Alfred Hitchcock

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