For a while, I’ve been trying to have other people do my research for me with no luck. I figured with all the smart minds in the stock market and other securities, some method would line up. It really didn’t for the fact that everyone could basically buy or sell as much of every available option to everyone. Some hedge funds or Warren Buffett could buy up an entire asset, but basically it was tough for stocks to run out.
I needed to find a limited asset class where one unique asset (house) and several buyers determine its value. That is why I eventually got to looking into real estate. Most of the public literature involves how to get loans and fix up the house. There is surprisingly little on actually determining a property’s value. So far I’ve only gone to the library and the local book stores to find information since most books are completely useless with nothing beyond, buy low, sell high. I’m not wasting my time and effort on ordering a bunch of books.
Eventually, I found a decent 30-page section in “Investing in Real Estate” by Gary Eldred on how people should value real estate. Much of the techniques will sound familiar. Some stretch the concepts quite a bit. I think there is some great ideas to be extracted. While, I’m just starting to wrap my head around the various ideas, here are a few highlights from the book.
• Much of the real estate valuation market is based off appraisals. Almost all of it. The problem with this method is that the appraisers may not have all the knowledge needed to make the correct evaluation. Or they are just trying to get a deal through. The concept of appraised values almost perfectly aligns with the idea of expert player rankings. Every expert sees everyone else’s rankings and with many touts not wanting to be “different” or wrong, they will set their valuations to appease everyone. Remember, don’t blindly follow expert judgment.
• These are the assumptions listed to make correct real estate valuation and how they may be applied to fantasy baseball.
- No one acts under duress. Duress happens all the time in fantasy baseball. An owner needs something and completely overpays further crippling the team.
- Buyers and sellers are informed. No one has all the knowledge nor do some want it all.
- All buyers and sellers know the property is for sale. This is so true with trades. That is how lopsided ones occur.
- The supply of money is typical. The “money” – whether it by draft picks, FAAB, auction dollars, or waiver wire priority – is never typical. The supply is always changing.
- No sale concessions or incentives. Another item which relates to trades. Many times a trade may seem unbalanced but not all of the league details are known
• The term used in the book for a house’s value is Market Value. It can be determined with three approaches. When all three don’t match up then “… your calculations err, the figures you’re working with are inaccurate, or the market is acting crazy and property prices are about to head up or down.” More on each one later.
- Cost approach: Cost to buy an empty lot and build a house
- Comparable sales approach: Compare similar properties.
- Income approach: How much income can the property produce.
• The first valuable hint was to “… describe the features of the property and the neighborhood in detail.” And a six-page document follows which a person can fill out. This quoted description sounds very inhuman when applied to a baseball player but it makes perfect sense. The industry already does it by labeling the player a platoon bat, power-only, limited to first base, on second division team, and so many others. When breaking the bank on a player, maybe I should see which factors to consider and which ones not to. The “neighborhood” reference can relate to the player’s team and division.
• Cost Approach. I had the most trouble linking this concept to the fantasy game. Owners can’t just spend $13 in FAAB and create a catcher who should hit .240 with 15 homers. The best comparison I have, and it’s a stretch, is trading for a player. Would you be able to trade FAAB or player to another team to get a comparable player? It at least provides another valuation point. So if a hot prospect comes up early in the season and everyone seems to want to bid him up, can a similar producing player be traded for instead? Would it cost more or less? This Cost/Trade approach is just one way to value a player.
• Comparable approach. For properties, owners are to “Understand the recent sales price, terms of sale, physical features, and location of similar properties.” Comp valuations are everywhere in fantasy baseball and it’s no different in real estate.
One similar idea in both is “PFA” knowledge. It’s when someone asks “How can I or anyone else come up with accurate amounts for each adjustment?” So they “Pull from the Air”. PFA is the reason appraised values should be taken with a grain of salt. The information can be pulled from the air or from a dark body cavity.
Even with the unknowns, good investors should seek out “differences that make a difference”. When given a list of comparables, properties or players, which features stick out? For fantasy baseball, I created the Muncy/Voit List and pERA to help find such difference makers. Every owner needs to know their own personal tools to help find the most talented players from the herd.
• Income Approach. Let me start with a paragraph describing how homes are valued: “Near the bottom of page 3 on the approach form, notice a line labeled ‘indicated Value by the Income Approach (If Applicable)’. This income approach refers to the gross rent multiplier (GRM). To calculate market value using the GRM, find the monthly rents and sales prices of similar houses (or apartment buildings).” What the …??? Simply it’s price over return.
While there are several methods to determine player return, at least some level of production needs to be used. Besides just complete irrationality, can anyone explain how in week nine (aka FAABapolooza) Nicky Lopez went for an average of $155 in the NFBC Main Event? That same week Kyle Seager and Gio Urshela went for $42. In no world should Lopez have been valued more than those two. Fantasy owners need to come to grips with the possible production and not overspend when someone similar can be added for less.
• Now, in keeper/dynasty, the future earnings are a major consideration. These real estate quotes could come from any analysis for keeper leagues:
“The greater its expected rate of appreciation, the higher the price you pay now.”
“When market expectations run ahead of reasoned analysis, prices overshoot their real potential for price and income growth.”
• A section exists on how “… higher-priced seemingly low-risk-high-appreciation properties may actually produce more risk and slower gains (or even more rapid declines in price) than their low-rent, highly troubled cousins…” Several paragraphs and a link to further in the book discuss how to value different risks. I’m just wrapping my head around these different methods. Maybe more to come in a future article.
• And tell me if you heard this one before:
“When investors optimistically bid up the prices of some properties, neighborhoods, and cities [players] relative to other properties, neighborhoods, and cities [players], you can profitably redirect your investment strategy …”
That’s all the hints I’ve been able to glean from the few pages. I’ve got some actionable hints (talent checklist for free agents) along with areas to further explore (valuing risk). Hopefully, some more hints exist from those hoping to make a killing selling real estate.
Jeff, one of the authors of the fantasy baseball guide,The Process, writes for RotoGraphs, The Hardball Times, Rotowire, Baseball America, and BaseballHQ. He has been nominated for two SABR Analytics Research Award for Contemporary Analysis and won it in 2013 in tandem with Bill Petti. He has won three FSWA Awards including on for his MASH series. In his first two seasons in Tout Wars, he's won the H2H league and mixed auction league. Follow him on Twitter @jeffwzimmerman.