Price is what you pay. Value is what you get. Warren Buffet
For those of you who don’t know, Warren Buffet is a professional investor. Most people consider him the greatest investor of the modern era, some refer to him as the greatest investor of all time. Regardless, Buffet is considered a value investor. Reportedly, he purchased his first share of stock at age 11. Subsequently, he built his entire fortune as an investor, something unique to the “billionaire boys club.” At an early age he learned the difference between Price and Value.
There are a vast array of anecdotes in Timothy Vick’s book “How to Pick Stocks Like Warren Buffet.” One of my favorites is how after numerous childlike ventures where he made a few nickels at a time, Buffet, at the tender age of 15, had saved up enough money to buy a 40 acre horse farm from his Dad, Howard. Howard Buffet ran a brokerage in Omaha. You can read the interesting details in Vick’s book but the upshot is Buffet studied economics, financing and business, and studied under legendary value investor Benjamin Graham at Columbia Business School. He later worked for Graham’s money management firm for a short time, until Graham’s retirement.
Buffet then returned to Omaha, Nebraska, his hometown and within a few years had started his own money management firm Buffet Partnership. He reportedly ran the business from his bedroom. The next step was to raise money which he did from friends and relatives with these steadfast rules:
- He could invest in whatever security he wanted.
- His fee was 25% of everything he earned investors above 6% annually. He didn’t exceed 6% they didn’t pay a fee.
- Investors couldn’t ask him about his investments. If they asked questions he wouldn’t answer them.
- Perhaps most significantly he wouldn’t enter into new investments more than once or twice a year.
The rest is history, much of which is recounted in this slightly lengthy interview with David Rubenstein.
So how do we assimilate Buffet’s value investing principles to real estate? Simple “Price is what you pay, value is what you get.” When it comes to real estate, Buffet understands value their as well. Perhaps he learned from his 40 acre horse farm. a few years ago Buffet commented on the value of real estate as an investment.
It is important to note the key to Buffet’s comments is the management of the homes as rental properties. As long as the cost to own and maintain the homes is exceeded by the monthly rent it is an income produce asset and most likely a good investment.
Its a little different when you are looking at a principle residence. Typically there is no rent to collect. There will likely be annual maintenance costs as well. As for price, there are all kinds of variables starting with location. For example which of these homes has a higher price tag?
Of course house one is the more expensive home, by a little less than $100k asking price. So from a value standpoint what do you get?what do you get?
House 1 $1,095,000 – 3 bedrooms, 2 baths, 1170 sq ft., approximately .15 acre lot (not a typo)
House 2 $999,000 – 5 bedrooms, 4.5 baths, 5500 sq ft, 3.3 acres.
House 2 is located in a prime neighborhood in Goochland and House 1 is located in a nice neighborhood in Carlsbad Ca.
Clearly there are numerous variables when the time comes to value a primary residence. Is this where you want to live? Start a family? Raise a family? Retire? Work? Send the kids to school? These differences don’t exist when it comes to buying other items, whether they are securities like stocks, commodities like gold or silver, or a car. The Ford Taurus will be pretty close to the same price in California as it is in Virginia, once you eliminate local taxes and fees.
So when a prospective home buyer is in the market for a home, and there is a shortage of inventory, the buyer has a decision to make. Wait for the market to shift and take the risk of time and increasing interest rates, or do what we call Prepare, Preview and Pounce.
Prepare your financing terms with a legitimate lending institution. Preview anything that fits your needs. Pounce on the home that best suits your requirements. Personally, I can tell you I am not afraid to pay a premium for the right home. I probably won’t pay an obscene price; but I am also willing to wait for the next one if the price gets out of hand. In addition any primary residence can actually become a good investment no matter what you pay for it – as long as you can afford the payments and cost to maintain the home.
If you aggressively pay off your mortgage, two things happen. You reduce your interest costs, and you build equity. When the time comes to move you then have options. Sell and take your likely tax free proceeds to the next home. Pull cash out of the home and use that for the next home, while renting the current home for positive cash flow. At that point your current home changes from a monthly liability to an income producing asset and therefore an investment.
Finally if, like most people, you buy a home live in it and then sell it, you are totally at the mercy of the market. If prices are higher, you may very well walk away with cash in hand – again likely tax free. If prices are lower, the outcome is different. There are other variables too. Interest rates, supply, demand, taxes, schools, convenience, medical facilities, and many other items most consumers don’t think about or factor in their decisions. In short everyone’s valuation of a principle residence is going to be determined differently. Whether it is Goochland or Carlsbad, location is usually number 1. The rest is personal.
This is why value indicators such as comparable sales are not nearly as reliable as people, including agents, think. More and more neighborhood are experiencing
Below is a look at the internal migration of Americans. Look and see which locations are the most popular. If you would like more information on best way to approach this market whether buying or selling, call, email or simply fill out a request form below.