One very unique thing about investing is the valuation process. While there are numerous ways to value an investment, the only true measure is what it can be sold for. While I can say a piece of property is worth $1 million, if it does not sell at that value it is simply not worth $1 million.
This is essentially the free market concept. You can set your own price and your business will succeed or fail based on the number of people who think they are getting value. Another interesting part of this equation is time. The more time you have to wait, the more likely you are to find someone who agrees with your valuation. However, as the saying goes, “the market can stay irrational longer than you can stay solvent.”
This is the crux of a very important issue in investor perception. Most investors make irrational decisions quite rationally. If I see a house that seems unreasonably valued, and then I see a similar house that is even more unreasonably value, the first house now seems like a bargain. This cycle continues until investors either run out of money or some event scares investors back into rationality.
The problem then over corrects itself. Investors go the other way, thinking that every house is overvalued, when it may have only been a handful. This happens until there is an overwhelming amount of value on the table; so much value that even the most naïve investor could make money. And the cycle begins again, and again, and again.
Small investors are always the most susceptible to these cycles because they have the least amount of information. They have no idea where interest rates are heading or where the next hot spot is emerging. At best they might read the Wall Street Journal or Businessweek. The problem with this strategy is that by definition news is old. By the time something is reported, it will already have happened. Furthermore, by the time your neighbor mentions it to you or by the time you see a special report, the market has most certainly moved on.
This begs the question, what is the small real estate investor to do? Simple, make the news. If you want to win big at real estate investing you have to know your market inside and out. This means that by the time the Wall Street Journal says Florida Condos are over-valued, yours has been on the market or sold. By the time Business Week says the new hot market is some where in Idaho, you have already bought five places from Jeff Brown.
Most of the time this will make you a contrarian investor, which is a risky proposition. The irrational markets and personal solvency issues come right to the forefront of this issue. However, if you know your market like you should these calculated risk should pay off more often then not. Its very rare to buy at the bottom of the market and to sell at the top of the market. Be happy just getting the cycles right. Buy and hold is a great strategy, but never look a gift horse in the mouth. If your market has gone crazy, there is nothing wrong with profit taking or buying like it’s a Blue Light Kmart Special..
If you read me often you know this is nothing new. I do, however, want to call your attention to the real estate climate we are in right now. Most pundits are predicting an extended decline in the real estate market. While now might not be a time to buy, it is certainly a time to start researching where you want to deploy your capital next. You could call this the calm before the perfect storm.
Again, don’t shoot for the bottom of the market. Look for rational places to invest that are currently experiencing irrational price declines. These could be normally hot markets experiencing flat growth levels (some parts of New York City), markets that have been pummeled back into reality (some parts of Florida), or emerging markets poised for a run (get Jeff Brown talking about Idaho). Regardless of where or what your strategy is, downturns in the market are a great time to get your ducks in a row. By the time the Wall Street Journal reports that the real estate market is back on its feet, you should already have made your decisions and closed on your properties. In real estate the penalty for buying a little too early is offset by the gains you can reap when you make the right call.
Closing Note to Realtors Out There: You should know your market better than anyone. If you know its a great time to sell, give your investors a heads up. If you can make a great case for buying, send your investors a list of homes that seem right. You would be amazed at how often this produces results. People tend to have lots of money or lots of time, very rarely do they have both. If you can provide a quick and sound investment idea, you will be certain of repeat business from busy investors. I was probably a human cash machine for my Detroit realtor because she knew timing and value. Its was a great win-win relationship.7 comments