You Have To Be An IDIOT To Value Real Estate THIS WAY... | Episode 88 - a podcast by Bryan Ellis - SelfDirected.org

How stupid do they think you are?  It’s the favorite lie of real estate marketers and turnkey rental property:  “Real estate in market X is at the same price it was 5 – 10 – 20 years ago… it’s on sale… it’s time to BUY, BUY, BUY!”  My friends, I’m SICK OF IT…  I’m Bryan Ellis, and I’ll tell you how they’re lying to you, why the lie sounds so reasonable, and exactly why your portfolio is being SCREWED as a result… RIGHT NOW in episode #88

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I just heard it on a radio show… yet again.  It’s a huge lie… but it sounds SO GOOD…

I’ll bet you’ve heard it, too.

It goes like this:  “In my market, houses are selling for the same price they were selling for 20 years ago… it’s time to BUY, BUY, BUY!”

DEAR LORD, people!  That may be the STUPIDEST justification for making an investment I’ve ever heard!  You’ve heard the old line “what goes up must come down”… a condensed version of the laws of gravity, and also a warning against getting involved in investments that are too hot for their own good?  Well, this argument – “houses are at 20-year-old pricing, so you should buy, buy, buy – well that one is the opposite:  They’re saying what goes DOWN – the house they’re trying to sell you – must come back UP.

Insane!

So let me get this straight…

When a person makes this claim… invariably to convince YOU to purchase a property from them… what they’re hoping you’ll hear is this:

“You should buy this house.  This kind of property could be bought 20 years ago for $100,000.  It appreciated a lot in the last 20 years, but now it’s back to $100,000 where it was priced 2 decades ago… and so it’s very undervalued and when you buy it, it will go back up and you’ll become wealthy!”

Yep, that’s what they want you to hear.  And that’s absolute horse manure, for 2 really big reasons I’ll tell you in just a minute.

The astute investor will hear it differently.  The astute investor will hear:

“Hmmm…. So, this property has the same price now that it did 20 years ago?  What’s wrong with this property, or this market, that the price of this property is the same now as 20 years ago?”

Would you ever buy that kind of logic in any other market?  Oh yes… I forgot… you can buy real estate indiscriminately because real estate always goes up, right?

PLEASE!

The same thing happens in stocks, too, right?  Remember:  If you ask any financial advisor, what will they tell you happens to the stocks of large, high-quality companies over time?  You guessed it:  They go up!

But Kodak didn’t get the memo on that one.  Neither did Blockbuster Entertainment.  Or Sears.  Or Sun Microsystems.  Or Radio Shack.  Some of those companies are still putting along at their “undervalued” prices, where they’ve been trading for years.  Some of those companies are totally out of business.

Yet… all of these stocks were once high flyers.  They were all market leaders in years and decades past.  But now… well… not so much.  But using the valuation logic that the real estate marketers are pushing on you, every one of them would be clear “BUY’s”.  Absolute caca, my friends.

So would you be willing to buy a big old share of Blockbuster Entertainment because it’s stock is so cheap compared to past levels?  Sorry… no can do.  That company is a shell of what it once was, and isn’t even listed on the stock exchanges anymore.

Yet… the EXACT SAME ARGUMENT – what comes down must go up – could have been made for buying into Blockbuster… or for any of the others…

Well… that argument is for the simple-minded… and for those who are willing to take risks with their portfolio by using logic that FEELS plausible, yet is totally and completely irrational.  Foolish, even… though it certainly doesn’t sound foolish when the charming real estate marketer tells you it’s time to BUY BUY BUY!

When you hear someone say to buy real estate today because it’s trading at the same prices as 20 years ago… they’re implying (or maybe outright saying) that the real estate they’re offering you is undervalued.  So, you should ask two questions:

Question #1:  If the property you’re trying to sell me is UNDERVALUED right now, what is the CORRECT VALUE… and how do you determine that?  The ugly truth about this, my friends, is that the correct value of the property is whatever it’s selling for on the open market right now.  Past pricing simply doesn’t matter.  And for you to buy the property below value – as they’re suggesting you should do – the only way to make that happen is to purchase at a price that’s BELOW the market price.  So if a property is selling for $100,000 and you pay $80,000 for it… maybe that’s a good deal for you!  But if it’s selling on the open market for $100,000 and you pay $100,000 for it… well, there’s simply nothing that’s undervalued about that.  You’re paying full retail pricing.

And Question #2… you should ask them this:  “I understand that this property is selling at $100,000 now and it also sold at $100,000 20 years ago.  But what is the price of the property today… using the value of money from 20 years ago?”  My friends… the answer is pretty brutal.  If money was still worth now what is worth 20 years ago, that house you’re about to pay $100,000 for would only cost $64,000… and that’s according to the nifty little inflation calculator over at the website for the Bureau of Labor Statistics.  That’s right, my friends:  That property they’re trying to sell you because it’s “undervalued”… well, the truth is that in real dollar terms – you know, the money it costs you to buy food at the grocery story – well, the property they’re pushing you to buy has actually DECLINED… SUBSTANTIALLY… in value.  Only you don’t see it, because it’s hidden by inflation.  But you feel it in higher prices now than 20 years ago… and the difference is STARK.

Now I’d like to be clear with you:  It IS possible to buy property at undervalued pricing.  It’s done every single day by savvy real estate investors.  And it’s certainly possible for you to buy a piece of real estate that’s on an uptrend, and which will be worth more in the future than it is now.  No doubt, this can be done.

But what I do NOT want you to do is to make investment decisions based on an absolutely asinine standard like the one that suggests that just because a property is selling for the same price now as 20 years ago… or even 5 or 10… that that alone means it’s a good deal for you.

The dirty little secret is this:  Most real estate investment marketers sell their properties to people like you at FULL retail value, and some of them sell for much more than that.  You are inherently NOT getting a good deal when you pay full retail value for a piece of real estate.  But they don’t want you to know that.  So instead of telling you the real truth – that you’ve got to buy it below the CURRENT retail pricing to get a truly “undervalued” price – what they do instead is “shift the goal posts” and have you compare the price you’re being asked to pay to historical pricing levels.  Their argument is:  It’s been higher in the past… it’ll be higher again… and you should BUY BUY BUY!

My friends… don’t fall for it.  I’m NOT telling you that there are no good deals to be found through real estate investment marketers.  But I am telling you to be EXTREMELY EXTREMELY careful.  Because that argument – it’s been higher in the past… it’ll be higher again – well, that argument is a smokescreen, and could hurt your portfolio very badly.

 

My friends… invest wisely today… and live well forever!

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