Knowlege is Power part II: Flipping cars to maximize market inefficiencies

Maximize knowledge

Maximize knowledge

Now for most people having a “blown” transmission is nearly the end of the
world.

Why? Well getting a new transmission could cost you anywhere from
$4,000-$7,000. Yikes. Even rebuilding a transmission will cost you close to
$3,000. So if you have a car only worth $4,000 and the transmission goes,
you are in a real bind. You have a car that won’t move and is essentially
only worth its weight in scrap. Here is where luck, knowledge and
opportunity come into play. I once bought a 10 year old Mercedes with
85k/mi on it. Its book value was close to $5000. I bought it for $1000.

Why so cheap? It had a bad transmission. The Mercedes dealer quoted this guy
near $4k to fix his transmission. But I had knowledge on my side. What I
knew is that I could buy a good used transmission from the junkyard for
about $400 and have it installed for another $300. So my total investment
was about $1700 ($700 in parts and labor, and the purchase price of
$1000) I just paid $1700 for a car worth near $5k. And two weeks later I
sold it and made $3300. Hope you are catching-on to how this works!
Your goal is to exploit market inefficiencies
and to add value.
Your goal is to exploit market inefficiencies and to add value.

Let me explain.

In an ideal market, things sell for exactly what they are worth. Yet,
we almost never live in an ideal market. For example, on a hiking trip as a
kid, I once saw one friend sell a can of soda to another kid for $10. “That’s
crazy,” you are thinking. But ten miles out in the woods, there are no other
options if you want a soda – so the price can be very high. The market is
inefficient because there is strong need/desire and little option. Inversely,
the lady that sold me my first car had life-factors like divorce, which created
a kind of pressure for her that also led to market inefficiency. Because she
had not advertised the car well and desperately wanted to get rid of it, the
price was low. For us, this is a gold mine. We exploit market inefficiencies
to buy low and sell high.
Yet the other secret is to “add value”. Like the Mercedes example above, a
car with a bad transmission is almost useless. And the original owner either
couldn’t be bothered to do the repair and/or wasn’t smart/knowledgeable
enough to know how to get it done cheaply. By fixing the transmission or
even by adding a battery to the first car I ever bought, I am adding value. I
am taking something from a non-useful state, investing my own time and
money into it, and getting paid back in a windfall sale! Now that’s smart
investing.

http://www.FlipCars.org

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