Profit, Ethics & Capitalism

16 Replies

Good Day All. It seems to me that so many BP or successful REI stories are about scoring properties at a steal, and following up with potential sellers with umpteem phone calls to convince them into selling their home to you at far far below market value. I had a girlfriend many decades ago who's mantra was "buyer beware" - meaning of course that "all is fair in love or war or business. And so, as a newbie, it really bothers me to hear an REI with a success story saying "Woohoo! I just scored a property at 58% of its market value", when they're also could be saying "I just swindled a nice old lady out of her life savings for a down payment on my new Lexus". No comment really necessary. My intent is on Win-Win deals, wherein I split the profit, not maximize my own. I expect that I'm not the only one out there. For the others, yo must know that the old energy of Capitalism as extortion is dead, and life & business will cease to be profitable & pleasurable for any anyone with this mindset. Regards. Ross

I try to operate personally as a benefit corporation. I want all to benefit from the transaction and business of real estate. when i flip i treat my contractors better than necessary by buying lunches and doing the little things to let them know i care. In purchasing distressed properties im trying to create a out for the owner that is less painful.  For the other investors i work with as a realtor i am trying to help them make wise descisons and sharing my knowledge. I think in real estate their is plenty of money to go around and view is from an abundant perspective rather than scarcity. It seems to be just a better method of practicing business and life in a mutual beneficial way. 

@Ross McKenzie any deal, where one party is not able to bargain fairly is not a good deal. Most of my best deals come from folks that come to me and want out. They set the price and I either take it or not. I do enjoy the fact that I get some great deals, but I don't think I have ever taken advantage of someone who is not able to understand what they have. And in reality, when you buy a house at 58% of ARV! it usually takes 22% of ARV to rehab! then 5-10% to carry and/or sell, making a profit of 10-15%. And we have to make that profit to stay in business.

But there are thieves out there, hopefully the old ladies have families that keep them from getting swindled.

I prescribe to the Milton Friedman (renowned economist) view of business.

One thing he is famous for preaching is in essence this: A business sole purpose is to make as much money as possible for the owner or shareholders while conforming to the basic rules of society.

You can read his famous article hear:

@Ross McKenzie   While I feel that people getting properties at a "steal" might seem bad... from my point of view I see it as a benefit to the current occupant of the home.  For whatever reason that person is in need of selling their home (or apartment complex or whatever it may be).  In the case of short sales, they need to sell their home before the bank forecloses.  For many homeowners, taking an "undervalued" offer is a far better alternative than having to file bankruptcy.  

If they had wanted to, or were able to sell their home for more money, they would do so.  There are plenty of real estate agents they could list with that would tell them the exact value of their home.  I'm sure there are people in the world, and maybe on this site who will trick individuals for selling their home grossly under its market value.  But usually selling your home for a very reduced price is done for a good reason (the buyer is cash and can close quickly, they're saving you from foreclosure, etc.) and the seller knows what they're getting in to.  

"Greed is Good"

If you don't understand that, its very difficult to make money.

agreed Christian.  I believe in making as much money as possible while remaining ethical in doing so.

Ross - Win/Win is always great.  

Most of us create a win for someone other than ourselves.  Whether it is an agent who makes a commission, contractors who profit from the rehab, neighbors who benefit from an eyesore being cleaned up, the buyer who ends up with the home of their dreams at a great price, or the lender who makes the loan .... those are all win/win scenarios.

I buy foreclosures at the courthouse steps.  Most people don't see that as win/win. We kick out a lot of people who stopped paying their mortgage a long time ago.  I'd love to figure out a way to make it a "win" for them as well.... but by the time the house is mine, it is generally too late for them.  Its hard to picture a scenario my evicted defendants would see as a "win"... other than simple charity.

Bottom line-- I score houses at 58% of the ARV every week. I'm a proud capitalist. And we run an ethical, honest, responsible business that doesn't swindle anybody in the process. We focus on as many winners as possible in the process... but we will never be able to make it a win for everyone.

Thanks a lot for posting this Ross.  I'm glad to see I'm not the only one who worries about whether what I am doing is ethical.

I personally agree with most previous posters.  Getting a current homeowner out of a house that is dragging them down and profiting from it yourself is a win-win situation.  However, grey areas are quick to pop up in an industry like RE and a person's view of what is "ethical" can be distorted very quickly.  Every big financial fraud in jail right now started with small grey area decisions that eventually snowballed out of control.

It is absolutely great to make as much money as you can in this business, but if something feels off or you're not sure what you're doing is right, just walk away.  The money isn't worth the loss of sleep.

@Ross McKenzie  I've been conflicted myself.  And I am sure many investors have had similar thoughts.  And I think it is good to not kid ourselves that there is no ethical question to be asked.  That said, let me offer some experiences that I have had that have helped me rationalize getting a steal:

I bought a house at a steal for $11K.  There was all sorts of gotchas.  Rehab went way over budget.  I ended up losing money on the deal.  I'm glad I didn't offer more.

I once bought a condo for $50K, put in $7K, and sold it for $75K.  I advised the lady that it was salable as-is several times over a couple of weeks.  But just didn't want to go through the hassle of selling it through a realtor.

On some deals I'll do really well.  On others there will be gotchas.  If it didn't balance out in my favor I wouldn't be in this business.

I take risks, and suffer stress and headaches, and in return reap a reward.  The sellers reduce risk, take the easy/quick road out, and that is the reward for them.

While I don't believe in raking a little ole widow over the coals there are those homeowners who have been quite derelict in their homeownership responsibilities and commitments and frankly have let the home fall into ruin and haven't been diligent on their financial contractual responsibilities. For those I show no mercy as the last time I checked PROFIT IS NOT A DIRTY WORD.

One of my favorite TV shows. Ethics in America

http://www.learner.org/resources/series81.html

This series uses the Socratic method to build analytical skills and examine ethical questions. The programs aim to sharpen moral reasoning without favoring a particular position by exploring ethical dilemmas in legal, political, medical, corporate, and military arenas. Panelists include Antonin Scalia, Faye Wattleton, and Peter Jennings.

Produced by Columbia University Seminars on Media and Society.

While not real estate specific, it covers many ethical situations from numerous points of view

@Ross McKenzie my father used to be an auto mechanic, and he dabbled in bodywork too.  Before I was born, he used to buy cars that needed work (brakes, tune up, paint, etc.) out of the classifieds.  He'd fix them up and then sell them for a profit, or keep them as his daily driver car.  People willingly sold him their junky cars for cheap, and then other people willingly bought them for lots more money.  This is the same thing that house flippers do.  Some people own things that they have allowed to run into the ground, and they sell them cheap because so few people want to take on that kind of work.  What is wrong with that?  They off load their headache for some cash, and the buyer can fix it up and either sell or rent it for a profit.  Both parties win.

Here's another scenario: I work as an engineer.  I get paid a certain amount per hour.  The company I work for bills clients much more than my pay rate, because they have overhead costs to cover, and then if there's profit left over, they get to keep it.  Am I being taken advantage of?  Of course not.  I work here willingly, they pay me willingly.  As long as there are no threats, no lies, no intimidation, and all parties enter into agreements willingly, it is perfectly ethical.

Another thing to consider when people buy "steals" is the convenience they provide. That comes at a cost. If a little old lady is willing to sell her run down house to someone for 58% of ARV because she wants to move in with her kids, or has medical bills, or whatever, that is her prerogative. Rather than go through the hassles of finding a realtor, fixing up the place enough to sell it on the MLS, dealing with getting offers and counter offers, worrying about whether the potential buyer will get approved for a loan on her crummy shack, etc., she can bypass all that and sell it to one person directly. That convenience rightly comes at a cost - that cost being a lower price. If she decides that an extra 10% of ARV is worth not having to deal with all that, that's her decision and her right. Have you ever seen people advertise their furniture on craigslist "Moving this weekend, we need to sell everything, come make an offer!!!"? Their desire to get a deal done fast and with less hassle costs them some money. Convenience always costs money. It's more convenient to have the pizza delivered rather than pick it up, but guess what, it costs more too. Some people are willing to pay for it, some aren't. There are no ethics regarding either choice. It's merely that, a choice.

Interesting.  Thank you all for your participation.  I see that there are at least a few people who have considered the question, and understand the value of integrity in modern business.  Sorry for having seemingly offended so many Capitalists in the asking of the question.  At the end of the day, "(s)he who lives by the sword, dies by the sword",  or "we reap what we sow". Regards, Ross.

Ross McKenzie

Am I missing something. I know I'm a newbie on this platform but I thought this was a BUSINESS (CAPITALISM) PLATFORM. I didn't realize we all deserve trophies.

I appreciate this discussion, even though it happened over a year ago. 

I think everyone in this business rationalizes what they do to some extent. I have no qualms whatsoever about buying anything off the MLS for as low as I can get it. They have licensed representation working for their interests. I also have no problem getting any kind of REO, HUD, or other institutionally held property for a rock bottom price. They and I profit when and where possible, and we all agree on that.

With individuals, it's not so clear cut for me. Sometimes it really is a win for a seller to save their credit, or walk away with cash quickly, or get rid of an unwanted property without much effort on their part. But what disturbs me are the myriad negotiating techniques geared towards relentlessly beating people down on price. Once that is accomplished, the rationalization engine kicks in. 

I'm sure that with many of us, how we feel about what went down is influenced by how the seller feels about it. If they feel like they got screwed, we have choices: 1) Deny what they feel, and rationalize what we did; 2) Accept what they feel as their biased perspective, and feel comfortable with what we did; 3) Accept what they feel as having some validity, and look for ways to improve our work in the future; and a number of other possibilities. 

If they feel good about what happened (testimonial anyone?), no problems. 

Some of the other postings in this discussion about maximizing profit at all costs (with a sprinkling of ethics thrown in to be politically correct) are indeed disturbing. Our world is showing the human and environmental costs of such oversimplified and narrow perspectives. Thank you, @Ross McKenzie for raising the question and for those thinking more deeply about what responsible business in the 21st century can really be. 

(Side note: Didn't the "greed is good" guy go to jail in the end?)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here