Author: Mr. Cheap

Win-Win Deals

“All agreements must be win-win or we don’t do them!”

Some people like to insist on deals being a win-win. That’s awfully nice of them isn’t it? Both sides have to get something out of it. Kind of like… every deal. Right?

There’s certain language that makes me cringe and put a protective hand over my wallet, and “win-win” is one of them. Its a phrase that sways ignorant socialists who believe every capitalist is out to cheat and pillage. “We’re different” claims the get rich quick scheme du jour. They then cheat and pillage the people they sell their system to and teach them to cheat and pillage other ignorant people (ideally family and friends through some sort of pyramid scheme).

ALL deals are win-win. Otherwise people wouldn’t agree to them. And if you’re forced to agree to them, its still a win-win (since you’re avoiding whatever fate they’re threatening you with if you don’t agree). I’m strongly opposed to forcing people into an agreement, but ultimately there has to be some incentive for people to agree or else they’d just say no. For example, I merged blogs with Mike, in part, because he told me he’d break my kneecaps if I didn’t. I’ve been delighted to continue through my life with unbroken kneecaps (walking rules!). I haven’t regretted the decision to merge for a second!

That being said, every agreement has mutually beneficial elements and zero-sum elements. Take the example of an employment contract. One side gets money (which the employee wants) and the other side gets labour (which the employer wants). The amount of money exchanged for a unit of labour becomes a zero sum game. The employee wants to be paid as much as possible, and the employer want to pay as little as possible. There’s no “win win” in this situation, since every dollar the amount shifts benefits one side to the detriment of the other. Of course, if the deal becomes too one sided, it will probably fall through and both sides will “lose”. The way agreements happen is there’s an overlap between what each side is willing to give in order to get what they want. We like to think of this as a fixed point (“this is the lowest I can go!”), but without fail I think its a range.

One of the few ideas that pretty well all economists agree on is that trade is good.

The troubling part of “win-win” deals is usually the person talking about how much they want to do right by you also wants to dictate how you’ll “win” from the deal. After fooling you into what a good guy they are, they’ll then tell you what an incredibly good deal they’re giving you. Often by setting up complicated legal arrangements that prey on people who are trusting the nice man who says he’s helping them out.

Beware the man who says “trust me”.

Announcements

Big Announcement

The idea has been discussed a few times in the past, but a bunch of us finally got the ball rolling and set up a few conference calls to discuss it more seriously. Four Pillars and other Canadian Personal Finance blog are going to join forces!

The resulting site will look something like a newspaper, where each of the former individual blogs makes up a column. We’re going to set up collaborative filtering (like Findory if you ever used it), so the site will use each reader’s individual history of clicking on posts to determine the layout. E.g. if you like debt reduction blogs, then the specific writers you like and other debt reductions blogs will be given more prominent placement. Of course there will always be a random “injection” from other blogs that you haven’t read before to expose readers to new blogs and ideas (which is the whole point of this idea).

Each “column” will have its own RSS feed (and direct link), so if you want to bypass the main page and just keep reading your favourites, that’ll be easily possible too.

Part of what swayed some of our fellow bloggers was how well Mike and I have been able to join our blogs together, so the rest of the crew offered to let us “break the story”. Expect to see announcements on most other Canadian PF blogs later today and throughout this week.

One of the sticking points (and the reason for so many drawn out conference calls – sigh) was figuring out what a good name would be. Our current working title (complements of Mrs. Pillars – she’s great with names!) is “Canadian DreamQuest for Four Thickening Capitalists on a Million Dollar Journey in a Garden of Pillars of Guinness Clawing Their Way Through a Financial Jungle With a Foxy Squawker, Larry the Wealthy Canadian and the Middle Class Millionaire Using a Financial Wallet full of Financial DIY Looking for Growth in Value and Wondering Where all the Money Went In Canadian Mortgage Trends in the 416“. We’re hoping that something catchier may present itself before we go live (or soon after so a rebranding isn’t TOO painful). Please feel free to make any other name suggestions here or in the announcements that should soon be appearing on other Canadian PF blogs.

Wish us luck, this is going to be great!!!

Late breaking news

We’ve just recently completed a deal which would mean that Bill Gates will be doing monthly guest posts on the new blog so watch for that!

Real Estate

Chain Investing

If you watch late-night infomercials, or attend the “free real estate investing” seminars, a popular element of the sales pitch is grinning people talking about buying property with “built-in equity”. They talk about getting a property, pulling $100K of equity out and going on a trip to Hawaii.

I’d like to get $100K and a trip to Hawaii!

The question rational people will ask is, why would properties with a bunch of money in them be sitting around for the taking like that? Why wouldn’t the gurus just hire a bunch of employees, buy up the properties themselves, and make lots of money instead of telling other people how to do it? These are great questions, but lets talk first about where the $100K is coming from.

Basically all the various techniques boil down to buying a property for more than its worth, paying what its actually worth, and getting the extra cash from the larger mortgage. Say you buy a $300K house, get a $400K mortgage, you give the seller his $300K, and pocket the other $100K. Yes, this probably involves fraud. Yes, this is “free money” in the same sense that a credit card with a $5000 limit is “free money”; i.e. its not free money, its debt. All you’ve managed to do is qualify for a loan you probably shouldn’t have qualified for.

So you go to Hawaii, spend the money, and expect to pay back the debt by selling the property after it appreciates or through income it produces. HOWEVER, in a normal markets, its going to take a long time for a property to appreciate 33% (and you’ll be paying high mortgage payments while it does). AND its very unlikely any income from the property will support such a high price (I recently did a post that (hopefully) showed how hard it can be making money from a property, even when its “reasonably” priced).

Alligators are properties where people have bought them for “investments” but they’re losing money on them every month. They need to sell at an inflated price to pay off the outrageous mortgage, but no buyer is going to overpay as much as is needed to dig the seller out of their hole. I think the joke is that they’re called alligators because they eat you rather than feed you.

Chain investing is something along the same lines. Instead of pulling the money out and going on vacation, you use it to buy another property (and you can pat yourself on the back for being *SO* “responsible”). Say you had 5% down for a property. You buy a property, and get a 7% cashback mortgage. 2% should cover the legal fees, and gives you back your 5%. You’re now in the “exact same place” (not quite, but we’ll get to that) where you started, except that you have a property in addition to your cash. Rinse and repeat until you have as large of a real estate empire as you want.

The problem with this is that each of your properties is leveraged to the hilt. Any downturn in the market is going to be magnified by the number of properties you own. If values go down, you won’t even have the option of selling some of them to raise quick cash if needed (they’ll all be alligators). With multiple properties, the chance of emergency repairs (like a furnace or roof replacement) obviously goes up.

Luckily lenders SHOULD stop you from doing this, but again the gurus will show you all sorts of techniques (some legal, most not) to get around them. Casey Serin basically tried this approach and put himself 2.2 million in debt before the foreclosures started.

If a property is “worth more” than you paid, pat yourself on the back and enjoy the extra income (or capture it by reselling the property). If there’s no extra income or if you can’t resell it, how can you fool yourself that its worth more? Borrowing against expected future earnings can be as irresponsible as buying consumer goods on credit. Either way, you’re paying a price (the interest rate) to have things in the present that you won’t earn until the future. If there’s any chance the future income won’t support the debt you’re incurring, you’ve gotten yourself into a very precarious position.

Real Estate

Running the Numbers

It always drives me nuts when people recommend a specific investment, give a bunch of reasons to buy it then finish with “of course, do your own due diligence before buying”. As I’ve written before, it always feels like such a cop-out. Often books which specifically claim to help you learn how to buy stocks or real estate will give the same out. Or they’ll encourage you to talk to an advisor before making any purchase (not a bad idea, but didn’t you buy THEIR book for information, then they just tell you to go talk to someone else).

I’d be a little more accepting if they gave a detailed overview of HOW to do your own due diligence, but I’ve seldom come across any writers even willing to give that. By way of example, I thought it might be worth running the numbers on a property currently for sale here in Toronto (this is an exercise I’d usually go through to decide if it was worth going to see a property and digging further into the details about it).

I like to watch real estate listings in one area of North York and another area called Crescent Town (which is near the Victoria Park subway station). I’ve been able to get a feel for prices in these two areas, as well as rents. If I found out another area that supposedly offered good deals, I’d look into it, but would be a lot more skeptical of my calculations (and would spend more time verifying things before making an offer or following through with a purchase).

Crescent Town is great in that its a complex with a bunch of buildings, so there’s a TON of comparables for any details you might want. The cheapest unit available is listed here (link will be dead eventually, I’ll write relevant details here – the asking price is $92,900). As a 1 bedroom unit, a $900 rental price is probably reasonable (that’s what other units in the complex rent for), as long as its in decent shape (which they claim it “Shows Well”).

Income ($900 / month):

$900 / month (rent)

Expenses ($476.02 / month):

$370 / month (condo fees)
$66.02 / month (0.8528434% property tax)
$40 / month (insurance – this is what I pay on my condo)

This is looking pretty good! $424 / month cash flow positive! Sweet! Perhaps we’ve been reading the Canadian Capitalist too much, and we know he insists on REAL expenses, not just the pretend hypothetical kind where we ignore stuff we don’t want to face (he’s such a stickler for reality!). So lets add on 5% of the monthly rent as a vacancy rate, and 1.5% / year of the purchase price as a maintenance rate (this might be a LITTLE high for a condo, since the corporation handles all outside maintenance, and SOME inside maintenance).

$75 / month (vacancies)
$116.13 / month (maintenance)

The maintenance DOES look high, but we’re including in this things that are expensive and only rarely needed (such as replacing the carpeting or getting the unit painted – amortizing them over the length of time we own the unit). $233 / month profit is still pretty nice.

Lets think about transaction costs and financing now. Legal costs will probably be about $2K, Toronto’s new transfer tax will be $1,393.50 (1.5%), if we put 5% down (lets ignore CMHC fees) that’d run us an additional $4,645. So cash down we’re looking at about $8K (we’re assuming NO renovations are needed).

On an INTEREST ONLY mortgage at 5.5%, we’d be looking at paying $404.50 / month in interest (simply the purchase price, minus the down-payment, multiplied by 5.5% and divided by 12).

This puts us at $170 in the hole each month. We’re paying $8K for the honour of losing this money each month. And this is the cheapest unit in the complex. In order to BREAK EVEN every month, we’d need to up the down payment to 20% and for them to accept a purchase price of around $81.5K. To make $50 / month (as recommended by Violent Acres), we’d need a purchase price of $72.6K.

Surprisingly, telling sellers they need to give us a killer deal in order for us to have a cash flow positive property rarely produces good results. As a very low priced unit in the complex, I don’t think the agent or the sellers would take you very seriously if you went in and offered them a low ball offer. However, there’s nothing to lose, so there’d be no real reason not to (and maybe you’d get lucky and they’d need to sell for some reason). Some real estate investors claim the hardest part of getting into it is being willing to burn down the shoe leather looking at places and putting in low offers (trying to find the 1 in a 100 seller who will accept). This unit has been on MLS for a while, so I’m sure they’d entertain offers below asking.

Obviously you can make the numbers work for ALMOST any property by just increasing the down payment (as we did when we upped our down-payment to 20%). You have to be honest with yourself, however, that money has value. If you’re using it for the down-payment, you’re missing the chance to use it for something else (the opportunity cost). Assuming a 10% opportunity cost for the down-payment and transaction fees might be reasonable to include in your calculations (we won’t here, as it’d put us in the hole again).

Condos are notoriously bad money makers for people getting into real estate investing, and the numbers are usually bad. By being able to control the costs that are made up by your condo fees, in properties that you own on your own, you’re usually able to cut costs to turn a profit. The big advantage is that condos are cheaper than single family homes or apartment buildings and let you “try on” the landlord hat without being overwhelmed.

If anyone goes to view this condo (Guinness416 lives in the neighbourhood I believe), please post a comment with how it looks, and if anyone makes an offer, please let us know how it goes!

Opinion

Statistical Karma

I wrote on my old site about positive thinking, and how I believe it actually does effect what happens to us in life. I don’t buy into any of the spirituality or mallarchy that some people surround it with, I just thinking there’s a psychological element that gives us the same result.

I have similar feelings about karma. For those who are out of date with their Indian religions (and who don’t watch “My Name is Earl“), basically karma is the idea that you will “get back” what you put out. If you do good things, good things will happen to you, if you do bad things, bad things will happen to you.

Strictly speaking, I believe originally the “rewards” of karma were supposed to occur in the next life, but the new age movement has created a “Big Mac” version of the concept that gives you back what you get ASAP (i.e. in this life). The Wiccan faith has an amusing idea of the “rule of three” which is that you get back three times what you put out (I guess they believe in compounding).

How I think it actually occurs in the real world is due to statistics rather than spirituality. If you do good things, eventually you’ll be nice to someone who will randomly be in a position to unexpectedly help you. One time when I interviewed one of the people involved was a horribly unsocial computer nerd. Being a horribly unsocial computer nerd myself, I was happy to chat him up, although I was convinced he wasn’t going to be very involved in the actual hiring decision (I assumed he was just going to be the “nerd translator” for the people who would actually make the decision). When I turned down the job because the salary was too low, I later found out that he marched into the CEO’s office and championed my cause for 10 minutes until a higher offer was made. Sometimes it doesn’t hurt to swap a Babylon 5 joke or two over coffee before the “real interview” starts.

The flip side has happened far more often to me in life. Without fail if you behave badly to enough people, eventually you’ll annoy someone who will later be in a position to hurt you (or not help you). I’ll meet someone, they’ll under-estimate me, then they’ll realize there would have been something productive from interacting with me. I’ve met real estate agents who brush me off, and later realize I actually have money then try to suck up to me. In school I’d meet people who’d be rude to me socially, then later want to borrow assignments or get help with a project. At one interview the owner of the company was very rude to me from the start. As his technical guy rapidly warmed up to me (we shared some laughs discussing why vi is the one true editor and reminiscing about the BBS days) the owner clued in that I’d be someone it would actually be worth hiring and started trying to charm me. I’d already realized I wouldn’t want to spend 8 hours a day with the guy – I’d seen his true colours when he didn’t think I was worth impressing.

Yes, Mr. Cheap holds a grudge and karma can be a bitch :-).

Early in life I would get caught doing bad things often enough that I became convinced it was better just not to do them. I’m probably the law abiding person I am today, in part, because my parents convinced me bad things would happen to me soon after I did bad things to other people.

Personal Finance

Vanity Scams

With scams the best defense is often to discuss them and let people who haven’t run into them know how they work. Unfortunately, talking about scams can seem like a “how to” for scam artists, which IS NOT my intention here. I always love reading about scams and cons, in part to protect myself, and in part out of amazement at how devious people can be when they’re trying to part us from our cash.

Growing up I was good friends with one of those “super smart” girls we all knew. She’d have her compositions read in English class and everyone would make a fuss over her. You know the type (actually, if you do know the type and they’re over 18 tell them Mr. Cheap is single!).

One day my parents showed me a picture of her in the local newspaper. She’d had a poem accepted and was published in a collection. The next time I was at her house I congratulated her. She mentioned that she had got two copies of the publication and one was on their mantelpiece. I asked her if they’d sent her the two copies as author’s copies and she admitted that no, she’d bought them. I congratulated her again and let it drop as I knew she’d just been the victim of a vanity scam.

The person putting out the publication puts out a call for submissions far and wide. Everyone who submitted was accepted, then he offers the publication for sale at a hefty mark-up over his printing costs. He then sold a couple copies to each of the authors (not to anyone else – if some authors didn’t buy who cares? Most did) and started soliciting submissions to his next edition. The “authors” would have been just as “published” if they’d headed down to the local print shop and self published (although that might have been less likely to get their picture in the local paper). More info about this type of scam is available here.

Vanity scams work on our pride in ourselves or our loved ones (usually a spouse or a child). Most of us are predisposed to think that we’re pretty darn wonderful, and when someone comes along agreeing with us its tough to ignore whatever they’re selling.

“Modelling agencies” will do something similar when they tell you how beautiful your daughter is and how they can get her modelling and TV work. Who doesn’t think their daughter is beautiful, so the parents buy it hook-line-and-sinker. Then comes the pitch that a $800 photo shoot is necessary for them to accept your princess as their client. The parents pay, poor quality photos are taken, and they never hear from the agency again. If asked the agency can just say they haven’t found anything yet.

An uncle of mine years ago had an idea for a business selling fake pot plants. People could buy it to try and look cool to their friends without risking trouble from the police (I’m not sure what you’d do if one of your cool friends wanted to actually smoke it). At one point he got invited in for a meeting with a bunch of guys dressed in suits who claimed to be venture capitalists and wanted to invest in his business. The catch was that they wanted a couple of thousand dollars to do “market research” on his idea. Needless to say, if he’d had this money to give them it would have been gone.

A few weeks after her purchase, the book disappeared from my friend’s mantelpiece. I didn’t bring up the subject, but I hoped that she had got some wisdom as a “gift with purchase” of her book.

Be VERY careful when someone tells you that you have a wonderful opportunity (because you’re so special) if you just can come up with a bit of cash. They may be selling you a dream and nothing else. If you really have so much raw talent, they should cover the costs of giving you author’s copies, taking pictures or market research.

“O that men’s ears should be To counsel deaf but not to flattery!” – W.S.

Opinion

Customer Loyalty

For a while I was trying to launch a consulting / contracting career where I’d go and work on-site doing technical work for companies for a few weeks at a time then move on to the next place. I read everything I could get my hands on about consulting, especially technical consulting. One idea I came across that I thought was great was that of “The Warm Fuzzy Feeling“. He has a bunch of great suggestions on the page I’ve linked to, but I think there’s an overriding idea. Your job, when you’re providing services for money, is to make sure the customer isn’t worried. If you accomplish this, anything else is minor details.

I recently flew out to Edmonton to visit the university there. My flight was before the subway started running in the morning, so I had to book a car to take me to the airport. I called the lowest priced place I could find on Google (hey, I’m Mr. Cheap remember?) and the guy who answered had a thick accent. I explained when my flight was, and where I was going (domestic, not international) and asked him what time he’d recommend a pick up for. He asked me what time I wanted to be picked up. I repeated where I was going, and asked him what he recommended to make sure I arrive on time. He said that they just picked up customers at whatever time the customer wanted.

At this point I’m having visions of panicking on the morning of my flight when no car shows up and I politely got off the phone with him and called the next lowest bidder. The woman who answered spoke clearly, immediately told me a time (and broke down how she got to that time in terms of traffic in the early morning and processing time for domestic flights). She said she goes out to Edmonton all the time, and says she always gets through the security check quickly. She recommended that I check out the casino while I’m out there.

I’m feeling the warm fuzzies. I book a wake up call from them (as a back up in case my three alarms fail) and am quite confident they’re going to get me to my flight. I compliment her (she encouraged me to call her boss and talk to him).

The morning of the flight, no wake up call. Fuzzies are dropping. I call the company and tell them I didn’t get a wake up call. The gentleman on the other end tells me my pick up time. I repeat that I was supposed to get a wake up call and didn’t and I just want to be sure that the car is coming. He tells me that there’s nothing in my file about a wake up call (no fuzzies). The car did come, and the driver was amazing, chatty and engaging the whole trip. Fuzzies were coming back. At the airport, I was planning to give him a pretty nice tip, and when he gives me the bill, its $10 more than quoted (fuzzies gone again). He was a nice guy and he gave me the quoted rate (after I made sure it wouldn’t come out of his pocket – I still gave him the tip I was planning on).

This company could have had a customer for life if they had just got the wake up call and the price right. Sometimes things go wrong (I understand that) and if they’d just immediately apologized for not making the wake up call and promised to look into it (lie to me, that’s ok) I’d have been fine too. They’ve got a service running at 99% of amazing, and then they screw it up. Stop offering wake up calls if you can’t make them reliably. Raise the rates you’re quoting people (I HATE when companies try to change what they’re billing me without warning).

Companies often look at providing the minimum acceptable service, arguing with customers about what is reasonable or not, or they look at changing things only when tons of people complain. I think the article I linked to hits on something of value when it talks about going beyond that. Smooth out the rough edges and get rid of the things that irritate customers (but not enough that they complain). Occasionally get a friend to use your service as an outsider and tell you how you can improve.

To clarify, I’m NOT saying “do whatever the customer wants at whatever price he wants to pay”. I’m saying keep an eye on the customer experience at your company, and continually remove things that irritate or worry them.

It always amazes me how companies market so aggressively (if you go on Google car rides to the Toronto airport seems to be a fairly competitive market), but then they couldn’t care less about your experience as a customer (which will determine whether you use them or a competitor in the future).

A book also along these lines is “Raving Fans” by Ken Blanchard and Sheldon Bowles.

Announcements

Crazy Experience

We didn’t write about it earlier, but Mike and I recently got a chance to speak at a blogging conference down in Boston (we got some laughs playing up the Canadian accents). The talk went well, but what was really crazy was on the way back we actually saw Bill Gates at the airport! He was getting a coffee at Starbucks and hitting on the barista, and although his two security guards tried to stop me, he saw me walking over to him and actually talked to me!

After chatting a bit (I didn’t tell him I was a Linux user), I mentioned that we were there for a blogging conference, and that we were going to be meeting a potential advertiser while we were at the airport. I asked him if he’d be willing to walk by and greet Mike and I by name (just to impress the advertisers). He had a chuckle about that and said that he would.

About 30 minutes later, we were half-way through our meeting and true to his word Bill walked up and said “Hey Mike and Cheap, how’s it going?” To which Mike replied “Dammit Gates! Can’t you see we’re in a meeting here?!?”