How a Spreadsheet Saved Me (a Lot of) Money
Around 2005, I was fortunate to have some excess money I wanted to invest. This was during the boom years of real estate, so that was a natural possibility to explore. "Flipping" houses (buying a house, making improvements, and then selling at a profit) was quite popular, and I was a big fan of some of the house-flipping shows on television. While on a run, I noticed a small house that looked like a good candidate for flipping. The house seemed to be ideal: It was well within my budget; it was in a good, stable, family-oriented neighborhood; and was close to my home. So I called the real estate agent and arranged for a showing. Despite a number of cosmetic issues, the house was well built, and I could easily envision how to improve it. After viewing the house and researching the potential value, I created a simple spreadsheet that analyzed the investment potential of the house. I did a "what-if" analysis that examined a range of possible scenarios: worst case, best case, and expected. For example, in the best-case scenario, I estimated that I would have to won the house for 6 months before I could sell it. In the worst case, I estimated it would take 18 months. After "running the numbers," it became pretty clear that the investment was not worth the risk (at least to me). The best-case outcome was that I would make around $10,000, but if the worst-case scenario came true, I would lose well over $10,000. The expected scenario would only result in a profit of about $5,000. Some people would have made this investment, but I decided that under this range of possibilities I did not want to invest the time, effort, and money required to improve the house. This turned out to be a good decision; the housing bubble burst at about the time I would have been trying to sell the house. In fact, the house remained for sale for a very long time after I looked at it.
Questions
1. What role did information play in this decision?
2. An electronic spreadsheet was very helpful in making this decision. What would have been different if spreadsheet software was not available?