A Tough Market: Why Your Advisor Is So Important

Thanks Victoria Peckham for this flickr photo.
I often read John Mauldin. He has a unique perspective on the financial markets and macro-economic issues. Yesterday, I received his weekly e-newsletter and it had an interesting quote from Charles D. Ellis.

…Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

I began to ponder about this in regard to the real estate markets. I was able to establish that this statement works for the real estate market. In every market marginal value is constantly being ground out as competitors compete with one another. This is why free markets are so efficient and why competition reduces the cost to transact. Now in real estate the complexities of financing, insurance, construction and other specific knowledge, make transacting less efficient than say using e-trade to exchange stocks and bonds (this means you can find value in the inefficiency if you have the right adviser). Yet, real estate too must adhere to the indifference principal.

OK… so, work with me here. If you are a buyer or seller in the real estate markets (or any other markets for that matter)… And you are looking for value in your next transaction… And you yourself are not a big player in these markets (most home owners only transact several homes in their life times and often there is many years between transactions)… And you want to compete with others in the market…

Find the best help you can. Don’t just look for the agent that says, “I have lived and worked in the neighborhood for many years”. Although, specific market knowledge is important, the internet has now made it so any agent can search the local multiple listing service and see the limited inventory that is available. Look for the advisors that demonstrate the largest capacity to create marginal value in your next transaction. For example, in the Bay Area we have found that our strategies for buyers allow them to win competitive offers even when they are not the highest offer. We accomplish this by preparing our clients financially. Working with a competent financial planner/mortgage broker we developed a strategy for our clients that allows them to close their leveraged transaction in 7 days verses the typical 30 days. We do this with no additional transactional risk. This is based on the market mechanic that sellers are willing to take a lesser price if it means they get their money faster. This is just one example of the marginal utility that we create for our Bay Area buyers. This strategy has become even more valuable in the current liquidity crisis where sellers are highly concerned with whether a buyer can complete a transaction or not.

The real estate markets are tough. So, seek the best help possible.