As a nation on edge and in the midst of the worst economic crisis since the Great Depression, many of the daily aspects reflected in “Americana” seem to have become taboo. For the past two years our stunned and gun-shy population has wandered through news of continued job losses, store closings, grim foreclosure statistics driving the economy south, and consumer confidence to all time lows.

In times of chaos and turmoil it’s normal to wonder who is to blame for our collective misery as it is expected that we all seek solutions to our temporary slump. However, one unfortunate by-product of this circumstance is the blurred distinctions between actions that lead to recovery and those that caused our loss. In the real estate industry this has become most evident in the grouping of profit with greed, and investment with speculation.

Profit vs. Greed

In a recent article for the Washington Post, conservative columnist George Will writes, “Greed, we are agreed, is bad. It also is strange. It has long been included among the Seven Deadly Sins, which suggests that it is a universal and perennial facet of the human fabric.” He continues on with the example of ticket brokers, like Stub Hub, to illustrate his point that the open market properly punishes greed with missed opportunities and sudden collapse due to improper timing. “Greed is worse than a moral defect, it is a cause of foolish pricing. That is why markets know it when they see it.”

Without entering a conversation about regulation versus free markets I would concur that greed unchecked leads to downfall. Further, the collapse of the US housing market shows that the unfortunate side effect of unchecked greed is the collateral damage done to those who were not greedy but remain caught in the crossfire.

Profit on the other hand is a basic tenet of Capitalism and the cornerstone to our free market society. Profit is the engine that propels entrepreneurs, investors, and jobs, manufacturing, creativity, and expansion alike. In his seminal book “The Science of Getting Rich” Wallace Wattles explains that one must always give more in “Use Value” than they receive in “Cash Value.” His clear yet sometimes lost point among business ventures is that a properly functioning marketplace allows for a reasonable entrepreneurial profit to those who add value to the business process. This distinctive balance lies within the intent of the business performing the service.

In illustration of this point can be found in the real estate industry by comparing investors to speculators.

Investor vs. Speculator

A real estate investor is an individual or entity that invests equity into a real estate asset for the purpose of generating income from or adding value to the existing improvements. Investors can have long term or short-term strategies. They may use their own capital or they may borrow (leverage) equity to varying degrees. Some create value by curing defects either physical (dilapidation) or financial (cash buyers with quick closings), while others employ long-term hold strategies that gather value from timing and appreciation. Yet all prudent investors share the distinction of returning to the marketplace “Use Value” for the profits or “Cash Value” they earn.

Speculators can share timing and leverage strategies with investors, yet that is where the similarities end. The intent of a speculator is not to add value to the economic engine; rather they look to take advantage of the marketplace by simply getting in line first. The speculator is driven by greed. Profit margins and financial gain are not based on business strategies that help balance supply and demand, thus making the business plan viable in the long term. Instead the speculator looks to horde or corner markets to their advantage intending to reap exceptional short term profits before quickly exiting the marketplace without regard to what is left behind.

The Soap Analogy

Most all of us bathe on a regular basis. To do so effectively we use water and some form of cleaning agent. For this example let’s assume we all use soap.

If one were to plan for a shower and find all the soap gone, the reasonable response would be to go down to a convenience store (grocery store, warehouse store, or drug store) and buy another bar. Most of us would look for the best bargain or our favorite brand and gladly pay the store’s asking price. For this transaction to occur we realize that some other business distributed the bars of soap in large bulk quantities to that store to accommodate our smaller purchase. Before that, a manufacturer bought raw materials mixing together bars of soap to later package and sell to that same distributor.

Each step along the way a business invested their capital to provide a service both for the entity before them and customer who comes after them in the economic process. For this privilege and purpose each investment entity earns a tidy profit. By charging too much for their service they lose customers and go out of business. By contrast, not charging enough leads to loss, inhibiting the ability to remain a viable and profitable concern. Either way, free market forces act to keep profits in balance and all of us clean. Further we support these profits and welcome the service provided by continuing to buy bars of soap.

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