If You're Watching The Market You're Not Watching The Ball

Let’s assume you’re interested in buying real estate, or on the other hand, you must sell. When is the right time?

You’ve read my opinion in these pages about holding property you can’t afford…don’t. Get out, because the market will not come back strong enough to recover some of the really stupid purchase prices we saw in 2002-2004. Make up your losses on a deal made today, not by holding on to an old one.

But what about buying in this market? Will you regret jumping in if you buy now, and the market tanks even more? Will you again be the dummy because you bought before the market hit bottom? Or will the real estate market turn, and you will wish you had bought while the prices were down?

The answer may seem counter-intuitive, but it is the same as my advice to Sellers. Do it now. Here is why…

You’ve heard my theory that for several years we got caught up in the Ponzi scheme. Investors acted like drug abusers turned loose in an all-night pharmacy. The Ponzi drug demanded that we forget about elements of value, created and confirmed over years. Location, costs of construction, fitness for purpose, income stream and other traditional elements of value were ignored because someone else was about to buy the property. Condos with 8 or 10 units were built badly, on postage stamp parcels, in order to get more units on almost no land, with poor parking and zero consideration for quality. Investors bought because they were told someone else would buy and pay more, and for no other reason.

But through all the glare, value remains. When you find a house you like, and pay a fair price with some reasonable relationship to cost to build, chances are good that your price was fair. As long as the price is reasonably related to the cost to build, you can bet the price won’t change much, because no one can build for less than cost. If you buy income property that creates a profit, calculation of value is easy. That so many income properties sold at enormous premiums above value, when calculation of value for such properties is so easy, can be explained only by the Ponzi. But those days are over. The market for high-priced stuff built poorly has disappeared. Buy for demonstrable value, and that value won’t change much, whether the market goes mush or mushroom.

The trouble with investing according to market trends is that a trend is only that when a significant number of others has already acted. By the time that fact is discernable, the trend may change again. Real estate investments aren’t nearly as easy to get into or out of as stocks and other investments. Even if you get lucky and anticipate a market trend, you may not be able to get in or out of real estate quickly. As a result, those who make these investment decisions based on today’s market are probably destined to be both disappointed and neurotic.

If you must sell something you bought 3 years ago, do it and don’t look back. Forget what you paid, except to calculate your tax loss. Sell for an amount approximating value, considering all the appropriate component parts of value, and the market will prove you right. Buy the same way.