Real Estate Veteran Moses Kagan Highlights Crucial Distinction Between Ability and Propensity to Pay

Moses Kagan, co-founder and partner at Los Angeles-based Adaptive Realty and ReSeed Partners, recently underscored a critical concept in financial and transactional contexts: the difference between "ability to pay" and "propensity to pay." In a concise social media post, Kagan stated, > "Put another way, ability to pay doesn't matter, in the absence of propensity to pay." This observation, emanating from a prominent figure in real estate investment and property management, emphasizes that financial capacity alone does not guarantee payment.

The distinction is fundamental in various sectors, particularly in credit risk assessment, lending, and tenant management. "Ability to pay" refers to an individual's or entity's financial resources, such as income, assets, and credit history, indicating their capacity to meet financial obligations. Conversely, "propensity to pay" delves into the behavioral aspect, reflecting a willingness or likelihood to honor those obligations, often influenced by factors like past payment behavior, ethical considerations, and perceived value.

In the real estate domain, where Kagan operates, this concept holds significant weight for landlords and investors. A tenant might possess sufficient income (ability to pay) but could still default due to a lack of willingness to pay, perhaps stemming from dissatisfaction, financial mismanagement, or other behavioral factors. Lenders similarly grapple with this, as even high-income borrowers may strategically default if they perceive no significant penalty or benefit in doing so.

Financial institutions and businesses increasingly integrate behavioral economics and advanced analytics into their risk models to assess propensity alongside ability. This holistic approach aims to mitigate risks associated with potential defaults, even when traditional financial metrics appear favorable. Kagan's tweet serves as a reminder that human behavior remains a paramount, often unpredictable, variable in financial transactions.