Tuesday, September 27, 2016

Warren Buffett’s “Value Investing” Secret Formula is a Solution to Solving Real Estate Bubbles (Part 2)

“Real knowledge is knowing the extent of one’s ignorance”, Confucius

In part 1 of this series, we discussed how Value Investing paradigm for the stock market has created enormous wealth for investors like Warren Buffett. The use of Value Investing made sense in evaluating trades do to the volatility and “corrections” that periodically occur.

Up until around 1970, Value Investing innovative techniques for real estate were not created and were unnecessary because property market values, cost of production, and fundamental values were in sync with each other.  Since then, in many residential and commercial markets, property current market values and their associated costs of production have significantly detached above these properties current fundamental values.

This “Margin of Loss” gap creates a hidden risk that market participants are unaware of until the real estate bubble burst. By that time the financial damage has occurred. This damage does not just impact the property buyer, as in the case of our stock market example, but rather the whole “food chain” that made loans, purchased loans, and bought financial instruments collateralized by these loan. 

The time is right to innovate a Value Investing strategy for real estate. “Margin of Loss” gaps are appearing in unsuspecting real estate types and locations around the country mainly due to: 
  • Globalization and “hot” money flowing into real estate from other countries. 
  • Loose money lending standards and misguided political policies.  
  • Investors taking greater risks in search of higher investment annual yields due to low annual yields of risk free alternative investments.
  • The markets “Irrational Exuberance” and speculation regarding a property’s forecasts.
  • Unsustainable market rents due to unresponsive bank lending for development projects that are needed to keep up with normal supply and demand for certain property types.   
Any one of these “causes” will create a “Margin of Loss” gap between a property’s current market value and its current fundamental value. The reason being is because these “causes” throw off the economic balances that were bullet pointed in Part 1 of this series. 

The trick to protecting yourself in these situations is to know exactly how big this gap might be, if any,  for your specific property using a Value Investing analysis BEFORE you buy or lend. 

So how can Value Investing techniques be used for real estate? You currently can’t buy this information from a valuation expert or trusted advisor. The valuation industry has not adapted  this new technology and continues to only give their opinion of the appraised property’s current market value. As previously indicated, this current market value of a property could have significantly detached from its fundamental value creating a wide “Margin of Loss” gap. 

Valuation experts reflect the market’s expectations by using recent comparable sales and other market metrics. Built in to these comparable sale prices and other market data are the market’s forecasts. If these comparable sale prices are not reversed engineered into the market’s forecasts, valuation experts and their clients will be unaware of any imbalance between the four economic balance bullet points indicated in Part 1 of this series. 

In these volatile changing times, we are still making buying and lending real estate decisions solely based on a property’s current market value opinion derived from comparable sales. In addition, we are not even analyzing the market’s forecasts that make up the property’s current market value opinion. Lastly, by not using Value Investing technology, we cannot see how dangerous the markets forecasts might be until we know the exact “Margin of Loss”, if any, between the property’s current market value and its current fundamental value. 

By continuing to value property in a “Vacuum” is analogous to “rearranging the deck chairs of the Titanic”. No matter how many accurate current market value opinions you receive on any given property, the results will be the same if a large “Margin of Loss” gap is not detected and the property is purchased or used for lending purposes. 

The general market of buyers and lenders cannot be expected to learn and create complex financial models, complicated algorithms and computer coding, and learn generally accepted appraisal standards needed to create a competent Value Investing paradigm technology.     

So a team of valuation experts, coding developers, web designers, and financial mathematicians were assembled to create a Value Investing Software for Real Estate called Valuexpose. This recently launched cloud based product was designed so that even the novice can learn and perform a Value Investing analysis on any property type and in any physical or economic condition.  

We are currently assembling a team of early adapters to train and use this product at no charge.  
Message me and I will send you a login and password to gain access to the software. Also, free training will be provided through a Udemy™ on-line training course specifically designed for the Valuexpose software. We are limiting the early adapters to 100 users that will receive a free lifetime membership at no charge for their feedback. 

The Dodd/Frank financial reform, tighter lending standards, limiting supply, low interest rates, and government guarantees have done nothing to stop bubble formations. As a matter of fact, these “reforms” are actually fueling new and more dangerous bubble formations. These formations are occurring in various property types and in various locations. There are thousand of different types of bubbles forming all over the country. “One bubble size fits all” is a misconception.

Please comment and share this post to keep the conversation going in solving the real estate bubble problem. Become an early adaptor of this new technology that takes investment analysis to the next level and standard of care. 

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