Opportunity Costs

I recently saw a billboard with the offer ‘We Buy Ugly Houses’ and thought this had to be a popular company. For the next several miles I pointed out all the ugly houses to my wife but she finally enlightened me that the company likely only wanted run-down houses that they could repair and sell for a profit. They would not be interested in that estate home with the purple shutters and green doors nor would they want the bungalow with the phony field-rock siding that did not match the stucco.

We guessed that these entrepreneurs would do a quick and cheap fixing of any major repairs, cover the floors in inexpensive rugs or vinyl and paint all the walls in water-based paint. They would add a couple of cheap purple shutters and if necessary, apply another layer of guaranteed-for-life shingles to the roof. This upscale, modern home would fetch many dollars on the market, and no doubt improve the assessed value of all the homes on the street. These people likely got their start by buying a home, fixing it up while they lived in it and then sold, hoping to work their way up the real estate ladder to a home they would keep. But instead of taking a year or more to complete the transition, the company could flip the house in month.

I suppose the used-car people do the same thing only they do not advertise for ugly cars. They just offer to take anything on trade, patch it up and hope it will run for 30 days. The people who are in the buy and sell business have to know what to buy and how they are going to turn a dollar on it. They are not in the same league as those folk who sit at a keyboard, watching the stock prices, and try to buy low and sell high on Bay Street. All they have to do is watch and wait until some novice comes along and buys high and sells low and they can make a loonie or two. No, the people in the added-value business of ugly homes and broken vehicles must have their wits about them.

They are not unlike the people who show up at the Garage Sales an hour before everyone else, looking to scoop up all the undervalued household treasurers that you have hoarded for years but your wife finally says had to go or else. I learned a long time ago what ‘or else’ meant. I wanted to keep that old chair that Aunt Bertha had left us, and judging from how quickly the early bird picked it out, I knew I was right for once. This thought was reinforced when I saw the sign on the side of his van as he turned around. It said ‘We Buy Junk and Sell Antiques’. I knew we should have kept that chair!

I started to whine about the twelve dollars I got for the chair when my wife set me straight. I was told to take the twelve dollars to the bank and invest it. She was certain that in the next six years my twelve dollars would be worth more than any appreciation that chair may have earned. She had been reading The Wealthy Barber again and was applying the compound interest theory to Aunt Bertha’s chair. As a closer to the argument, she reminded me of Opportunity Costs. I went back downstairs to put away the unsold items for the next sale.

Opportunity costs are the result of not doing something, or not taking the opportunity to make some money. They are not the costs of doing something wrong, but of missing a chance to do something right. The problem with opportunity costs is that they can be a little subjective. If I had not sold Aunt Bertha’s chair and it had appreciated to twenty-five dollars and the bank only gave me three dollars in interest, I would have lost ten dollars. On the other hand, if in six years time I only received five dollars for the chair, there being a surplus of old chairs at the time, I would have suffered an opportunity cost of ten dollars.

It is a little like the City selling Otter Lake. The mayor and some councilors think they can make more money from interest in a Reserve fund and from property taxes than the increase in land value if they wait to sell the Lake at a later date. It is not a matter of the City needing the money as there is no compelling reason to sell the Otter Lake property. They see this as an opportunity cost, and being good business people, they do not want to see any opportunity to make money slip by we non-entrepreneurs. If there is a vacant lot used only by kiddies as a playground, it is obviously an opportunity cost.

On the other hand, if there is something the city is doing that they could be doing in a better way that too, may be an opportunity cost. If something could be purchased at a lower price, whether it be goods or services, that is an opportunity cost. If the city fathers and mothers could run the Heritage Festival better than the volunteers, that may be an opportunity cost we have to pay for next year on our tax bills.

Fortunately the Chief Financial Officer does not have to account for opportunity costs. Some of the past errors in judgment have shown up on the tax bills but they were only mistakes, not missed opportunities – or where they? What would our waterfront look like now if the city had not bought it? Would any of the development now creeping onto those lands been lost opportunities to provide not only more assessment but some quality of life value to the city?

That is the problem with opportunity costs – only the astute and daring can assess the present value of the item or idea. It is like buying ugly houses, or as my friend the early bird does, buying junk and selling antiques.