by Jeff Cussons, Realtor® CBC Saunders Real Estate Sales AssociateInvestors continue to struggle to predict a bottom to the current real estate market.
I share similar struggles, as no one likes the feeling of overpaying for an asset, even if that feeling is temporary. It reminds me, however, of one of my favorite allegories shared by the great investor Warren Buffet. It was written by his mentor, Dr. Benjamin Graham, and I altered the story a little to provide the prospective of value investing in real estate market.
I recommend that someone who wants to become a disciplined, successful, investor imagine a scenario every time he or she wants to buy or sell properties. Picture yourself in a partnership with a man named Mr. Market. Mr. Market is a manic-depressive fellow and sometimes he is euphoric about the state of the economy; specific stocks, bonds; real estate; or other assets. Other times, Mr. Market believes the world is ending and doesn't want to own anything for cash.
Every day, Mr. Market knocks on your office door and comes in offering to buy or sell his share of the property to you. He's rather agnostic on which you choose because he has set the price based on his mood.
Sometimes, Mr. Market is close to what you, a far more rational investor, believes is the true, or intrinsic value, of your company. Other times, he offers ridiculously low prices or unjustifiably high prices. What should you do as his business partner?
You have three choices, based upon how much cash you have available:
1. If Mr. Market offers a stupidly low price, you can buy more, increasing your ownership in the property
2. If Mr. Market offers a stupidly high price, you can sell him your portion and cash out
3. If Mr. Market offers a fair price or you simply don't have a lot of extra cash, you can do nothing - continue owning what you own, collecting income and sooner or later, he'll change his tune and you'll be able to take advantage of the situation.
It is important to keep in mind the current environment where “Mr. Market” thinks the world is coming to an end and to remember that that he is not a totally rationally being. The same markets that drove valuations to unprecedented levels in the earlier half of this decade are driving prices to irrationally low levels based largely on their moods at the time.
Real estate is a long-term investment. In order to capitalize in both good and bad markets we have to make our own judgments concerning the value of properties and base our decisions on our own knowledge, instinct, and analysis. We can’t predict how long Mr. Market’s irrational behavior will last, but we can capitalize on it by buying very high-quality assets at very low prices at a time when Mr. Market thinks the world is ending and selling into irrational exuberance.
Those opportunities don’t last for long!
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