My friend Kathy was house hunting recently. She found a cute little house in a nice
neighborhood, on a corner lot, and close to good schools. In her mind’s eye, she could picture a nice
yard for her kids to play in, and family cookouts in the summer – underneath
the mounds of snow that are there today.
Betty was an 84 year old woman who owned that home that
Kathy could see herself and children in. Betty had lived there for years raising her
own family of 5 kids in the small house built in the 1920s. So old, in fact, that it lacked a lot of
modern amenities, including heat in the 2nd floor. Despite that, they made it work. The children became adults, and moved out and
had children of their own.
Unfortunately, last year Betty passed away. She had long paid off the mortgage, and her
children helped with the major chores at the house, such as plowing the
driveway. As her loving legacy, she left
the 5 children an equal stake in their childhood home.
Betty’s children listed the home for sale, and that’s where
their path crossed with Kathy.
The house was listed at $300k, but in order to get into move
in condition, the house needed $30k worth of work.
Kathy made a bid for the full price, minus the repair
work. The children countered with their
list price, no adjustments for work done.
Of course Kathy walked away.
While I’m sure the children were saddened at their mother’s
loss, how much do you think they valued their mother’s legacy left to
them? After all, they all had their own
homes and had no desire to move back to the old, yet charming, place where they
grew up.
So, how much is that house really worth if it can’t be
sold? Zero.
This situation highlights a key concept in personal finance –
liquidity.
The Merriam-Webster dictionary defines liquidity as:
consisting of or capable of ready
conversion into cash <liquid assets>
When people own something – such as a house – and it’s worth
some dollar amount, is it really? One
thing we don’t often think about is how easily we can extract the value from
that asset for as close to what we think it’s worth.
For example, if you have $100 in a checking account, there
are so many ways you can get your money, and you can get the full $100 in value
when you take it out.
But when dealing with other assets, such as houses, yes the
children could sell the house right away, but could they get the full value
from it? Likely not.
So when you look at your 401k statement, or hear on the news
home prices are rising, take a moment to think how much those are really worth.
I’m sure Betty was showing her love for her children in
leaving them the home worth $300k. Instead, all they have are the memories.
