I just finished reading a Michael Lewis article in Vanity Fair about Dr. Michael Burry, the physician-turned money manager. Burry is profiled because of his remarkable success in buying credit default swaps to bet against the subprime loan market. He saw what many of us saw – that subprime loans were a ticking time bomb, and he was among the forefront of investors who were able to capitalize on that knowledge.
But that’s not the part of the article that caught my eye. Burry, like Warren Buffet, is essentially a “value” investor. The subprime bets were simply a recognition that he could make money by betting that those loans did not have the value ascribed to them by the wider market. Here’s the part of the article that I thought most applicable to real estate investors: Burry’s investment philosophy calls for him to look for what he calls the “ick factor” – investments in companies that have serious problems, but which are still, fundamentally, good investments. (The example in the article discusses one particular company where the executives went to jail – but it was still a good company.)
Finding Valuable Gems amid the Muck
This value-based philosophy can pay dividends in the real estate market as well. Often, properties that have the most obvious, and off-putting problems, are those that will attract the least interest from investors, meaning less competition, and are likely to be sold for a fraction of their true value.
A few years ago we made an offer on a mixed use building in downtown Anchorage, Alaska that had been vacant for quite some time. The “ick” factor was way up there: vagrants had started camping out on the front porch – not to be too gross, but there was frozen evidence of them, not to mention an actual passed-out drunk (not frozen) on the steps. When we called the selling agent and told him about the drunk on the stairs, he joked, “that’s the security guard!”
Needless to say, there was very little competition to buy that building, which had languished on the market for over a year. While we did not ultimately close escrow, it was an amazing value, and I kick myself to this day that I was not more aggressive in pursuing it. It was later rehabbed superficially and sold for a generous multiple of the asking price when I looked at it. Another interesting lesson to be taken from this experience was that sometimes smaller markets (like Anchorage) can have hidden gems that would be quickly swept up in a larger and more aggressive real estate market, like we have in Los Angeles.
Next time you think “ick”, think again.