I remember several years ago my out-of-town, 6-year old niece
was coming to visit. My wife wanted to
make sure that she had a great time, so we were brainstorming a list of activities:
Bowling? No, that
could be done anywhere.
Movies? Same thing.
Family board games?
No, she might beat us…
Hiking? Not a bad plan,
but…
How about going to Carowinds, the local amusement park? Yeah!
It’s a bit pricey (around $50/person) but Carowinds is a legitimate, massive
amusement park and would provide fun for the entire day. And this would make her trip memorable. It was decided!
The big day came and we excitedly ushered my niece to Carowinds. It went well at first; the first few rides
were a blast! But then 30 minutes into our
adventure, my niece says (something to the effect of), “Well, that was
fun! Where are we going next?”
This was not a question I was expecting. Of course, the real answer was (something to
the effect of), “There is no “next”. For
50 bucks a person, we are staying at the amusement park for the next nine
hours. In addition, you are going to
love every moment of it and be bragging for years about how visiting your
Charlotte-based aunt and uncle was your childhood’s crowning experience.”
However, from a marriage perspective, I recognized that “my
real answer” and “the real answer” given to my niece could possibly be different;
I wasn’t sure what my wife’s appetite for niece appeasement was yet. And from an economic perspective, it was close
to immaterial. The Carowinds tickets
were a sunk cost regardless (we already bought the tickets). If we left the amusement park and went hiking
(free), it was a wash.
To me, this story feeds into how we handle broken appliance repair
calls from tenants in our Charlotte property management
company. When we get these calls, we
are left with the choice to either send an appliance repair person or just buy
a new replacement appliance. What’s the
best way to handle them? Sunk costs are
part of the decision-making process.
The economic analysis on these starts with the appliance repair
company. The way they bill is that it costs
roughly $100 for them to show up at the house and diagnose the issue (this is
the sunk cost- we bought it when we called them). If we choose to approve the quote for their
recommended repair, the $100 is credited towards the repair. If we think that an appliance is too costly
to repair, we can just thank them for the diagnosis, refuse the repair
recommendation, and pay them their $100 service call fee.
Lower-end appliances in the Charlotte market usually cost
somewhere between $500 - $1,000 when shipping, taxes, installation, and old
appliance removal fees are factored in.
Some of these decisions are common sense. If a new stove costs $800 and an older stove
is found to need $700 in repairs to fix, we’re going to replace the stove. However, for math purposes, the cost for a
new stove is really $900 ($800 for a new stove + $100 appliance repair company diagnostic
fee). Tacking on the sunk cost of the diagnostic
fee will make replacing appliances cost more.
In turn, the math goes down when repairing appliances. If the same stove is found to need $250 worth
of repairs, the real differential is $150 (the first $100 is a sunk cost). This usually makes repairing appliances a
better proposition unless there are other mitigating reasons to replace them (beat-up
looking, opportunity to homogenize mismatched colored appliances, etc.). $150 versus $800 makes taking the chance that
the repair would keep the appliance operating for a while very appealing.
The harder decisions are when the cost of the repair is 50% of
a new appliance. I tend to go towards
the repair. It requires less money outlaid
initially and I’ve found that older appliances seem to be built better than the
newer, low-end ones. The only problem is
when an older, repaired appliance breaks down near-term for a different reason
and I’m left eating the loss on the larger sunk cost of the repair (and holding
a bag of regret).
Smart landlords factor in sunk costs when in appliance “repair
or replace” dilemmas. Smart uncles also
factor them in to assuage anger when one is unexpectedly hiking Crowders
Mountain after paying to ride the Fury 325.
Happy Landlording!
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