The King of Knots as Metaphor for Economics

A knot is a useful tool for many purpose, and is one of the oldest tools used by people. The king of knots, called the Bowline Knot, functions as a very useful rescue tool, a tool to anchor ships to posts, a tool for lifting object or people, a tool for hanging things, and so  many other purposes. I like to think of this knot as a metaphor to describe economic cycles, real estate, mortgage, market cycles.

Having been a boy scout as  youth, I studied knots, and had opportunities to practice, demonstate,  and use knots in my boy scout training, and outdoor activities.  I am so grateful for that opportunity. I have had occasions to demonstrate my scout knotting skills through the years especially in camping situations as I am an avid camper.  Now that I have a son, I get to help him learn the knots too, and their uses: square knot, two half hitches, taut line, clove hitch, sheet bend, and of course, the king of knots, the bowline, which is also, my favorite knot.

To create the bowline knot, you form a loop and hold it with your left hand. Then, you take the bottom end of the rope with your right hand, and take it around towards the back of the loop, and into the loop leaving through the front, and going around the standing top end of the rope, called the tree (for fun), and then, back into the loop from the front, or the cave (for fun). Next, we take the non standing rope end, the bottom end, and tighten it away from the standing end of the rope and pull it snugly. We now have a tightened loop, that stays in place, and does not slide. If it slides, it is not a bowline. If there is no loop, it is not a bowline.  The loop needs to be larger than a simple hole. If the ends of the rope are coming apart, then there is no proper knot, since the whole operation gets messed up. The ends may need to be whipped with string to keep the strands united, or the ends can be fused to keep the ends united. With knot tying, practice is the key to success.  With economic planning, practice, trial, error and more practice is the key to success.

Just like making a bowline knot, you must follow the correct instructions when managing economics, and finances. Use loops when appropriate, make sure the ends are secure, make sure the right end is going into the loop in the right direction, and make sure the length of the rope is adequate and the loop is of adequate size for the purpose of making the bowling knot in the first place. Good economics requires planning, and direction. When there is some trouble in the financial world, I think of someone incorrectly tying a knot, such as a bowline knot. There is a process of making a knot, such as what I described above for the bowline knot. It would be a good idea if politicians, so called experts, business leaders, and individuals, spend time practing making knots, and practice the correct process with regards to economics and finances, whether mortgage finances, or real estate finances.

Just like knot tying, financial planning needs to be:
1. Simple and not difficult.
2. Must not unravel, or come loose.
3. Must be useful, and practical for many specific purposes.

Kenneth Fach, REALTOR
Weichert, REALTORS-Anchor
1607 Village Square Boulevard, Suite B103
Blog: http://KennethFach.wordpress.com
Cell 850-339-5753

Each office is independently owned and operated.

 

Principle of Substitution in Real Estate

The one important principle in real estate with regards to pricing a home for sale, is the Principle of Substitution. This is the benchmark of value, when determining what price range a home should fall in. The seller can put a price on the home, but ultimately, the buyer determines the home’s value.

There are many neighborhoods, and in these neighborhoods, there are homes on the market. We wonder, how did the seller come up with the price the seller is wanting for the home. Pricing is not an arbitrary activity. There is a system behind price, a system of value supporting a reasonable price range. It is kind of like a science, and kind of like an art, both combined together.

In the Principle of Substitution, you find the lowest priced home on the market in the neighborhood, one that is most similar to the other homes, and as close to the other homes, geographically.  Then, you use use that knowledge as the basis for determining a price range for a subject property that a seller wants to put on the market. With the subject property, that is, the home that is going  to put on the market, you can make price adjustments for features like fireplace, Florida room, cul de sac location, swimming pool. However, if the lowest priced home is $200,000, with 3 bedrooms, and 2 baths, and square footage around 1800 square feet, all the other homes that may be put on the market, that are similar to his information, should be very close to that $200,000 mark, with an increase in price for those additional features such as the examples given above.

 The Principle of Substitution just makes the pricing field fair, and even. It is a guidepost when all other factors are similar. It is not always easy to price a home for sale, but when you know what the lowest price for a home is in the neighborhood, the task is much easier.

When I am out looking at real estate, I consider all the homes for sale in the neighborhood, as well as the homes that sold in the last month, and last six months. I then populate the information in an Excel spreadsheet that i have on my Treo 700. I consider: location of each for sale and sold home, the square footage, number of bedrooms and baths, unique features, and age. I can get information from the county property appraiser website, HouseFront.com, and the MLS, all accessible on my smartphone. I can do research right there from my car, or as I am walking. When I get back to the office, my research is done. At home, I go to Trulia.com, and maybe another site or so to confirm data, and find additional data, that will help me accurately see the real estate values in the neighborhood.

Kenneth Fach, REALTOR, ePRO Internet Certified
Weichert, REALTORS-Anchor
1607 Village Square Blvd., Suite B103
Tallahassee, FL 32309
Cell 850-339-5753  Blog: http://KennethFach.wordpress.com

Each office is independently owned and operated.

Finding a Value Range in Your Real Estate

Things work well in the free market. Let the market alone, and the market machine will move forward just fine. In real estate, the buyer is key. The buyer determines value, while the seller determines price.

When putting together a Comparative Market Analysis, real estate agents look at homes that are as similar as possible, and as close geographically, to the home to be put on the market. The principle guiding the right approach to this task is the Principle of Substitution.

The Principle of Substitution says that the lowest priced real estate, most similar, and in the same neighborhood, will determine a reasonable value of the home that will be on the market. This should be the seller’s favorite principle of determing the price for seller’s home. It is the market in action. Buyers will not want to pay more for a property, if a similar property is on the market for less, or a similar property sold for less in the past month. Things work out good when the market is allowed to function.

Often, in sellers markets, where homes for sale are scarce, sellers get greedy, and ignore the principle of substitution. This even occurs in buyers markets, but the difference is that the greed element has less force when there is an abundance of homes on the market, and buyers can pick and choose more easily from the inventory.

The Value Behind Real Estate

In a successful real estate transaction, we must consider the  buyer. Without the buyer, there is no executed real estate sales contract. There is no home sold. There is no happy seller. The buyer in a real estate transaction is the gold. All the work in selling a home, advertising it, finding interested folks to view the features of the home, completing documentation, means nothing without a ready and willing buyer. The buyer determines the value of a piece of real estate, not the seller. The seller’s role is to put a price on the property for sale.

On the selling side, it is easy to forget the role of the buyer. The seller is busy in the selling role, and all that is involved: paperwork, mortgage issues, looking for next home, cleaning and staging the home for visitors, and so much more. The seller has much going on. The seller forgets that the buyer is in a pivotal position. The seller needs to look at the buyer’s situation, work out a harmonious transaction, and work as a team with the buyer. It is not a seller dominated transaction. A real estate transaction include a team: buyer, seller, agent, mortgage lender, title company, home inspectors, perhaps an attorney, handyman, and whoever else needs to be involved. All have their role, and the lines of communication have to be opened. A standard of operation have to be met. Again, the crucial role is that of the buyer.

I think of the crucial role of Gold and Silver in historical times, and up to 1971, when the United States was taken off the Gold Standard, that kept the nation’s economics relatively stable for much of United States history. For over 100 years, gold was the backbone of United States currency. It controled government spending, it kept the economy in check. After we got off the standard of Gold, we suffered the worst inflation in American history, and since, there have booms and busts, which are not typical under gold-backed dollars, unless government policy creates spending beyond the gold reserve.

Real estate has its standard, it support, its gold. It is the buyer. With a buyer and seller, and the real estate market, we have gold in the making.

There is Gold in Tallahassee

There I has been a lot of talk about standards: a standard in customer service, a standard in accounting, a standard for our goals, a standard to follow in one’s career, a bible standard, a standard way of doing something, and yes, the gold standard.

For over 100 years the Unites States operated on a gold standard. Money could be redeemed in gold. Gold controlled government spending. Gold kept the nation economically under control and allowed for America’s early prosperity. For thousands od years gold was a standard currency in the world, but other metals were used as currency as well, chiefly, silver. Silver was also used as currency in the United States.

Then came the shocking switch to fiat money. That is paper money not backed by gold or silver. Then came the resulting debt, high inflation, government over spending at will (just print more paper) and greater taxation to pay for big government.

I long for the days in which we can return to a sound standard, such as the gold standard or bimetalism, in which two metals (gold and silver) form the money standard.

There are people in Tallahassee, Florida who are finding gold in the earth and holding on to it. The day of the dollars is coming closer unless we get back to soun4, solid money.