Stan knows what San Diego properties should be worth.
Stan is a stock analyst by trade. He is terrific at valuing publicly traded stocks. His record at valuing San Diego apartment properties is not as stellar.
Stan lives in another time zone. In five of the six years, Stan considered 100 San Diego County apartment buildings for sale. He calculated an opinion on 60 of those buildings. He bought one. Stan was sure the other 59 properties were sold for more than they should be worth. In effect, Stan thought his competitors were making foolish investments.
The market was climbing 6- 12% annually. Most investors who bought San Diego County apartments more than three years ago doubled their equity. Stan was convinced that his model provided better analysis than the 50+ millionaires who had driven and inspected properties that Stan never saw.
Stan had immense confidence in his model even though it wasn’t based on San Diego or even California apartment sales. He saw no need to visit the properties he valued. Local reality was irrelevant to Stan’s prediction model. Stan knew what the property should be worth.
Working with Stan
When Stan and I met he had purchased one building. Stan was quite proud of his purchase. He never asked my opinion of his purchase, and I never volunteered it. During the time that Stan and I worked together, I introduced him to about a dozen opportunities. He wrote offers on five and missed most by 1% -2%.
I liked Stan and appreciated his intelligence. More than once I offered to show him a model of what the market would pay. I thought he would want to know how and why other millionaires were closing escrows. Stan didn’t need another perspective. He loved his model even though it routinely produced failed offers.
Stan wrote offers on five buildings while we worked together and bought none. On average the buyers of those five assets doubled their equity. Stan’s cash earned about 1% annually. So, considering inflation his capital lost purchasing power.
Within the last year, his seventh year in the San Diego market, Stan bought his second property. My other buyer clients bought about 70 assets in that period while Stan bought two. Most of my other clients earned better than 20% annually on their equity.
Lessons
The test of a pricing model or a strategy is whether it produces the desired results. It doesn’t matter how elegant your reasoning is if it doesn’t work for you.
If you can’t trust your expert, you need another expert. If you think you’re smarter than all the experts in the market … gosh … it must be wonderful to be that smart.
The market sets the price, and every market is different.
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What is your take?
What do you do when the best in the business do something you think is wrong?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”