The Greater Fool Theory occurs when a market is at the top by finding the yet uninformed individuals to release a seller’s burden onto. Usually this is done by tricking or lying whether directly or indirectly, withholding or omitting factual data about the item being bought or sold. Never assume you know everything about the item and never wholly trust the seller. Know how to do the ‘due diligence’ on the property or hire someone who does to research and underwrite the prospective purchase before signing into a deal. What can go wrong usually does. Everyone sells for a reason.
Greater fool theory states that investors can achieve positive returns by buying an asset without concern for valuation fundamentals and other important factors because someone else will buy it at a higher price.
There are scores of people who’ve lost large sums of money in Real Estate deals over the years, possibly that rank greater than those who’ve ever made money. The adage is, “money is made slowly in real estate; but lost quickly”.
Warren Buffet says: 'If you've been in the game 30 minutes and don't know who the patsy is, you're the patsy.'”
I have found that if a property has been on the market too long, that is greater than the “typical” time of similar properties, there is generally something wrong with it. No one is going to tell you what’s wrong with it, sometimes even when you ask… They will try to omit it, even knowing that this is illegal, because they watched several buyers walk away and they’re getting desperate.
You will also find it hard to get information from anyone, brokers, owners, even industry professionals may seem tight-lipped about a property offering only minimal information or refusing to take on your request, could be because they’re already familiar with it and it’s a liability, more trouble than its worth, and has issues.
If you call the Municipality about it, and the building officer or receptionist has a worried tonality shift in their voice (or some have a smirky tonality) somethings wrong with the property. It doesn’t mean to walk, but it does mean to dig until you find it to see if it’s a problem you can or cannot solve.
Anything radical is fractional and cannot be wholly reliable; if it's frantic it's a lie, if it's soothing, it's an illusion.
The idea of being a fool rests in the space between taking on a property that has a problem that you cannot solve, that’s where you lose money, or you are the savvy investor when you take on a problem that you can solve, where others either didn’t know what the problem was or weren’t able to solve it.
These are people that rush in and over bid a property just to get it without doing the research, which we see all too much as newbies during the “hyperbole-period” (soaring markets) where all you see are ads for real estate coaching /programs and realtors.
Buy Understanding the Myth of: The Theory of the Greater Fool
At the top of that market is when most of the smart money leaves or pulls back the reigns, and the fool’s step into the number one position as buyers, which is where we are at right now. Anyone buying debt at this point is either super savvy or very foolish. Last gasping sellers are going to try and get rid of problematic properties in order to not be holding any losing bets at this point.
The smart money will rather hold cash and wait for buying signals for the bottom as the fool’s will buy high and sell low, usually because they’ve gone broke. The objective is to not be the fool. No matter how much the media hype sells you on being the fool, you cannot fall victim to the Siren’s call lest you become dashed upon the rocky coastline.
How do you not be the fool?
The key is to be knowing what needs to be done. Deals exist in ever market, but you cannot be emotional, frantic, or flying blind. Educating yourself is possibly the number one first order of business in any venture especially one where the stakes are as high as in commercial real estate. Especially when you’re using OPM, you have an added fiduciary responsibility to your investors to know what you’re doing.
Always have a team of professionals you can trust and know what they’re doing as well. If you cannot inspect a property, have inspectors that can and know what they’re doing. If you cannot underwrite a property, have an underwriter who can and knows what they’re doing.
It’s common sense really, but you know what they say: “common sense isn’t so common”, and this is doubly true for any place in history where you’ve found the gold-rush mentality becoming apparent in a hurry, people skip over becoming acclimated and educated on the subject and short-cut their way into getting rich quickly. This is almost always a recipe for failure.
The team is essentially the way to go, however, now you have another issue which is being able to pick a team and their trustworthiness. Teams are usually in place over a career-time. Meaning, newbies that rush in to an up-market last minute will try building a team and only find sharks that are looking to steal deals from them, if they partner with them, they may not turn a good deal, this happened to me on my first deal (i.e.; Patsy)
The other option is to partner with other newbies, but then you’re all in the same boat unless your partners all have some previous experience from associated industries that can be utilized in the current marketplace you’re entering into. If you previously underwrite single family rentals, underwriting multifamily rentals should take only a modicum of re-learning to scale up.
In the end know that there is always a line of sharks waiting to take advantage of your failure’s and buy your fire-sales at a bargain price when you’ve lost you shirts on a deal gone bad. It’s the nature of the beast and this game relies heavily on it. There are straight-up scammers that only the most naïve newbie can’t detect, to the super slick ol’ timer whose been at it too long and can fool even the intermediate level just because they don’t know their reputation… yet.
Here's why you need to get educated, who to ask, who to associate with and how to see the truth through the lies. (the last one is a skill trait) Someone once said “you can’t fix stupid”, and if you think you might fall into that category, it may be wiser to get educated (you can educate stupid to be smart) and work on the serve side of the business instead of the investment side, granted you won’t make the exciting money everyone claims to be making, but you won’t lose the massive amounts of money no one will ever tell you they’re losing either.
Just like any casino, there are gamblers, dealers, security guards, managers, janitors, etc. The gambler is only a small part of the system. Sometimes they win, mostly they don’t *in a casino, the objective is to not be a gambler but a bona fied investor. Know what the heck you’re doing. Get armed with the facts by understanding the ‘real’ game, not the illusion.
No matter what’s going on right now, take a year or two to get educated, then another one to work in the industry, get a behind the scenes’ look at what’s really going on. Understand that you have the time to do it right and that a real market isn’t going anywhere, yes it will ebb and flow: change is the only constant. But, it won’t disappear on you.
If you’re experiencing fear & greed, it only means that you’ve got Gambler-itis and will lose sooner or later. It also means you don’t know what you’re doing and need to further educate yourself. To be self-aware of your inadequacies and limitations is a good thing, it allows you to change gears and protects you from getting into waters too deep or hazardous for your current temperament.
To get better educated, check out our books, courses and partners products. Don’t jump into the deep end until you know how to swim. We also have plenty of free materials to help you learn and grow in your professional craft. Treat this seriously. Remember that only the tallest buildings have the strongest foundations.
Visit www.CREMLS.com for Nationwide Commercial Real Estate Listings.
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