Know your value, build your value

Here are two situations in which understanding the current worth of our assets helped me and my cousin unlock additional value.

• The old car:

When we first moved to Los Angeles we quickly realized that this was a city where your car is more important than your friends. While my life in NYC revolved around choosing where to drink and meeting as many people as possible on a night out, our LA life seemed to revolve around traffic planning and shedding friends that lived more than 6 miles away.

Our first car purchase was a beater similar to the rental that had served us well during a long road trip despite being as big as an airplane bathroom (do ask my brother how much he enjoyed the back seat during one 8-hour drive).

However, 8 years later we were ready to part ways with our first car.

My friends kept telling me to change the tires, detail it, fix the broken touch screen, and go through a 120pt check before the sale. This would surely increase its value, they said.

The bill for all these upgrades? $1,897…

That was almost $2k in fixes for what I thought was a $5k car. Would these upgrades really be worth it? I just couldn’t believe this would yield any value. People are always looking to make money on a fixer-upper right?

I set off on my usual market research wormhole and found all the listings for similar cars in Carmax, Truecar, and my local dealers. As it turns out, the market was BOOMING and I was now in possession of an $11k vehicle! Thank god for bubbles.

The problem? Cars with issues seemed to be selling for A LOT less on craigslist. After calling several VIN buyers, it seemed like nobody was really interested in doing any work. The market was moving too fast, and clean inventory was a lot easier to flip.

Seems I was in possession of a $7k fixer, or an $11k vehicle after all was said and done. The market had spoken, and my research had paid off. I knew exactly what to do. $$$!!

• A 1990’s apartment:

After my cousin graduated college and began his first job, his father was quick in helping him leave his house. His mother’s efforts to sabotage the move did not work, but to compromise, a new apartment was found 2 blocks away. Solid post-graduation present.

Unfortunately, the apartment looked like it was decorated in 1975, but it was sturdy, spacious, and well-situated. After a few months too long of living under Bob Ross-looking 80’s artwork, my cousin got an offer to transfer to the New York office, and a decision had to be made regarding the apartment.

He could sell it "as-is" - at around the price he paid - or renovate it and THEN sell it, possibly making some money in the process.

Lacking finance skills and knowing I love these types of challenges, we went ahead and started our comp research. However, this time we did two different analyses:

1. We looked at all the apartments in the area and tried to see which ones had been renovated vs. the ones that hadn’t been. Costa Rica turned out to be an odd market, and surprisingly, there wasn’t much of a difference between the two sets of apartments. He was ready to let it be, but we explored renting it out as an alternative before giving up.
2. Before we modeled the cash flows, we looked to the market once again to help us understand what apartments had the higher rent. It was quite apparent that rent was driven by apartments being furnished vs. unfurnished. Further, by observing a couple of weeks of listings, nice furniture appeared to drive prices higher and lowered the time the unit was on the market.

Leasing the place would lead to income, which could help his future sky-high NY rent payments. He could also manage inflation by writing in automatic rent increases, and if the market made big moves, he figured he could always convince the tenants to leave by telling them he was coming back.

After “doing the math”, it became clear that renting the place was a much better option. With some fresh paint, new fabric on the sofas, modern curtains, and a few new abstract paintings, suddenly the apartment looked just as desirable as the high-end ones we saw.

Rent was maximized, and the apartment was leased in less than 2 weeks. WIN!

Present value & value potential

Using current valuations as springboards for value maximization is becoming more and more common in both personal and business cases. The prevalence of market sites, databases, and modeling tools make pricing assets a lot easier, and short-term market pricing is a key data point in any valuation.

Specific tools like Valuation Gap Analysis or a Strategic Alternatives Assessment can help you visualize the steps necessary to unlock the true value of an asset, subsidiary, or business unit. Even a rudimentary appraisal can uncover areas of improvement and allow you to better understand the market dynamics that influence the value of your assets.

Just like I was able to realize that fixing my car was a better alternative with a high return on investment and that pouring renovation money into my cousin’s apartment was not the right choice, by using simple valuation techniques, a business owner can begin to understand where to invest, how to drive value, and what needs to be done to unlock potential.

Remember, knowing your starting point is always half the battle.