The English philosopher Sir Francis Bacon said it best, “Knowledge is Power.” Well, to be precise, we don’t know if he ever actually said that, and are pretty confident he didn’t write it down either. He did write the Latin phrase “ipsa scientia potestas est” in 1597 though, which translates to “Knowledge itself is power” and this actually might have a better ring to it. Either way, no one is debating the value of knowledge and therefore, education.
Education is the foundation on which we stand and also the armor that protects us as we navigate the gale-force winds of life. Don’t just take Mr. Bacon’s word for it, Data from the Australian Census in 2016 shows that people with a University Degree earn $1,180,112 more over their lifetimes than those that don’t. Unfortunately, if you are buying or selling a house, it might not be worth the cost to go and get a whole degree, but a crash course in property and business from a trusted professional is worth its weight in gold.
Right now, we are in the eye of a storm that is reshaping our world. While the future is uncertain, change is inevitable and so instead of playing the fools game (predicting the future), I am here to tell you that the best thing you can do is to educate yourself and find the right strategic advisors. As volatility increases in turbulent times, so should your due diligence. But who to trust and how to learn? One problem with the property market is that there are advisors everywhere. In some areas, there is one Real Estate Agent for every fifty houses. Not fifty houses for sale, just fifty houses! With this fiercely competitive market applying pressure on consumers, to go it alone without the proper preparation is a mission that is doomed to fail from the beginning.
Carlo was born in 1882 in Lugo, Italy. In the 1920’s he moved to America for a better life for him and his wife, Rose. He was entrepreneurial and ambitious and thought he had found the perfect business opportunity. He realized that he might be able to take advantage of the international postal system, more specifically, Postal Reply Coupons. These coupons were invented to give people the opportunity to be able to send letters overseas and include a coupon for the recipient to pay for the cost of reply. Instead of costing people money when you sent them a letter, you could do them the courtesy of paying for their reply, genius. The man’s plan was simple, buy these coupons overseas in different currencies, and bring them to the United States and sell them at a higher value. Because of the difference between the currencies being used, there was an opportunity for arbitrage. The 1920s were a time of post-war optimism, and people jumped at the chance to make some easy money by taking advantage of this price difference. The man promised 50% returns to investors in 45 days or 100% within 90 days. Such a great investment was hard to turn down and the money started pouring in. Unfortunately, there was a problem with his business model. It was nearly impossible to turn the International Postal Reply Coupons back into cash and turn a profit, the math didn’t add up. For example, for the initial investors who gave him $1,800, he would need 53,000 coupons exchanged to make any money. For the 15,000 investors that came after them, he would have required a Titanic-sized ship to deliver them to America from Europe. He would need too many coupons to make it work. Now, we don’t know whether he knew this from the beginning, or if he started the scheme thinking it would actually work. What we do know is that man’s name was Carlo at birth, but later in life, as his investors knew him, he was Charles Ponzi. The Ponzi scheme is just one example of how the Agency Problem can cause people in positions of power to do the wrong thing and damage the lives of many along the way.
The Agency Problem is a phrase that defines the key issue when appointing someone to act on your behalf. It is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. While they are meant to have your best interests at heart, sometimes there are incentives at play that move them to do the wrong thing by their clients. A financial planner may sell you products that they get the biggest commissions on, a real estate agent may steer you into buying an investment because he was finding it hard to sell to others, or your hairdresser might think you need a cut every two weeks, instead of once a month. All these people are engaged by you to provide a service, and sometimes in life these representatives are unavoidable. Buying property is one of those times.
Real Estate Agents make their money by representing people who are selling houses, not buying them. Unlike in the United States, where agents can get paid by both the seller and the buyer, in Australia, it is a one-way street. What that means is that they spend most of their time working out how to do it well. Most Real Estate Agents are good people, who do good work. Any reputable agent is going to get the best price for the vendor while acting honestly and professionally. Some are even obsessed with methods of sale, marketing, consumer psychology, and negotiating tactics that are all geared towards making buyers pay more, and rightly so. Most people only buy a few houses in their lifetime, some investors might buy a few more, but overall it isn’t something you do every day. If you were to get in the boxing ring half a dozen times in your life, would you schedule each fight with Muhammed Ali? Would you want to pit yourself against Mike Tyson if you knew that he had spent his whole life working out how to knock people out? Everyone has a plan they think works when they start on their property journey, but as Mike Tyson said, “Everyone has a plan until they get punched in the mouth.”
So, as you enter the property market, you need to surround yourself with good people in your corner. Friends, family and advisors that you trust, who genuinely have your best interests at heart. These people need to be knowledgeable, objective and experienced when it comes to the specific areas and properties you are looking for. But it isn’t enough just to find the right advisor, because how do you verify the strategy they are undertaking? The highest level of protection you can have is your own knowledge. The word Education has two Latin roots, the first is ‘educare’ which means ‘to train or mould’ while the second is ‘educere’ meaning ‘to draw or lead out.’ To have great success in life we need to be trained and moulded when we are young, but as we grow we need to find exceptional people to lead us out to a better future. By connecting with experts in a given field, you will not only protect yourself from the common mistakes made in different situations but also set yourself and your family up for future success that can last generations.