I think most of us can agree that real estate agent, as a profession, lacks “street cred”. The reputation for our industry is not high and I say this despite the reputable people I meet here and elsewhere. Two ways to effect a change in that perception are: raise the bar of competition and adopt a better model. Sometimes we can do both.
In a recent post called It Takes More than Comps to Beat the Competition, I introduced a pricing model based on how assets are valued in the securities industry. As a former stock broker and options trader, I can tell you that the methods employed in the real estate world for valuing assets and advising clients are rudimentary. A more thorough understanding of what a property is worth and a framework for better understanding what that knowledge suggests would not only help us to do our job better, but it would separate those that use the tools from those that do not. Adopting a better model de facto raises the bar of competition.
A Quick Primer
From a securities standpoint, price is rarely the sole motivation behind a buy or sell. We are usually trading volatility or time or both. An asset’s value then, is affected by these two items. This is evident in real estate too. Good agents take these factors into account when they do comps, but we are generally lacking the common language and function for applying them. By adopting a better model, we gain these tools.
Volatility
Let’s use options as an example: an options contract is valued in relation to the underlying stock. This valuation is called its delta. On a scale of 1-100, a delta of 100 means the options contract might as well be stock. It is traded, hedged and valued as if it were the underlying stock. A delta of 20, on the other hand, means the options contract is very unlikely to approach the value of its underlying stock. It has only a 20 percent chance of holding value. I would therefore trade, hedge and value it quite differently. Now a delta Read more
