MONEYBALL – How to Earn Money in Real Estate Transactions

If the word Moneyball did not evoke any response from your side, you are reading the right article. Moneyball is a 2011 movie starring Brad Pitt.

Moneyball – a real-life baseball story

Brad Pitt playing Beane, faced with Oakland Baseball’s team’s limited budget for players, builds a team of undervalued talent by taking a sophisticated mathematical approach towards finding and analyzing players.

Beane does thorough research & hires undervalued players for his team in the limited budget he has. Facing a lot of resistance initially, he finally manages to get his way through. The team in its first season wins 20 consecutive matches after starting slow.

The result surprises all and Boston Red Sox team using the same model wins the World Series 2 years later.

Surprised? Let us take a look at what happened here:

  1. They did not buy bigger brand names
  2. They did not buy the noise in the market
  3. They did not follow what is called the herd mentality
  4. They worked costing in detail
  5. They focused on Win
  6. They devoted more time in studying & analyzing the players

Thus, they were able to save a lot of money by hiring the undervalued talent with the desired result. This leads us to a very interesting topic of Intrinsic Value.

Intrinsic Value vs Price

Real Estate Companies in India

Buying is a process. It does not matter what one is buying. There is INTRINSIC VALUE of the anything that you are buying. Then there is the PRICE.

If the PRICE is more than the INTRINSIC VALUE, you have overpaid!
If the PRICE is less than the INTRINSIC VALUE, you have got a DEAL!!

Incidentally, intrinsic value refers to the value of a product determined through fundamental analysis without reference to its market value.

Beane got his players by paying a PRICE less than their INTRINSIC VALUE. They were undervalued in the market. There was no noise about them, the market was not talking about them, and they were not big brand names already. It took some fundamental analysis on part of Beane & his team to find out these hidden gems in the pool of all the available players.

There is a chance that even if you overpaid, sometimes, the price may increase but it can be understood very easily that the rate of return will be highly diminished because of the higher cost of acquiring that asset.

Similarities with Real Estate Buying

When we say that buying is a process let us see if this kind of a buying process focusing on the intrinsic value is beneficial when it comes to real estate buying as well.

In our Roads to Riches series, we had published an article on COMMON BUYING ERRORS IN REAL ESTATE some time back. Incidentally, most of the errors we pointed out, matched with the precautions Beane took to buy players for his team.

Rera

There we spoke about how bigger brands get a lot of premium without actually bringing in much of value to the project. Case in point being DLF on Golf Course Road. Being a brand, they have a huge premium on their offerings on the Golf Course Road. The returns, as one can see, have already diminished because of higher buying cost. Similarly, Godrej on Dwarka Expressway has an offering of Rs.8000 per sft though the project is still to be delivered in 3-5 years time. As against this, delivered projects are already available at a rack rate of Rs.5000-6000 per sft on the same stretch.

Also, we are biased towards noise in the market which talks about a location being hot. The noise already pushes the cost higher for the property. Many times we find that a project is being talked about because of a new design which is nothing but a fad. The fad will fade away but not before it ends up taking more out from the pocket of the gullible buyers.

Home Buying Decision

With a little research & analysis, we can find these hidden gems while going for real estate buy as well. What is needed is an effort, clearing out the noise, not falling for the big brand names & a little patience to find such properties at less than their intrinsic value.

The market always presents us with many options. It is for us to choose the ones which can increase the return on our investment.