There’s an art auction. The auction has some art that was painted by a man who is now very dead. The art is expensive, everyone knows that. This art has been sold over and over again over so many years, and increasingly, of late, the art has been selling for higher and higher prices. It seems that there are two rich men from some foreign land that highly cherish this dead man’s paintings. The auction is scheduled, the advertisements (soft i) are placed. The paddles are printed.
The day of the auction arrives, and the auction house is pleased to find forty or more bidders gathered in the room. The two rich guys from the foreign lands are still in their foreign lands, but their representatives are on the telephone with the auction house and their representatives. The last two pieces by this same artist were sold last year for $10MM each. That’s a lofty sum, and the auction house has now placed their pre-auction estimates at $12-15MM, allowing for some appreciation over the year. The bidders at the ready, the auctioneer takes the stage. The room is a buzz with interest, the phone lines quiet except for the nervous breathing of the representatives.
The auctioneer, with his auctioneer tone, asks for an opening bid. He is English, so he asks in a most polite manner, almost as if he’s expecting no one to bid and the auction to be canceled, but one bidder does chime in with a half-hearted bid at $1MM. The room chuckles, the ice is broken. Quickly, the bidding reaches $10MM, then $11MM, then $11,250,000. The room grows silent, the auctioneer inquisitively begs. The phone bidders have not yet bid.
Thirteen Million! the phone representative cries out. Fourteen, says the other. Fifteen. Sixteen! Twenty! The room gasps. The opposing phone representative hushes her tone and implores her foreign, anonymous phone bidder. She whispers, though the begging is apparent. The room is unsettled now, with many heads shaking, eyes cast down, or around the room, whispers fill the space. There is an incredulous feeling owned by all present. The auctioneer is attempting to remain stoic, but he, too, shows some sign of disbelief.
The hammer drops at $20MM, a full 100% over the price that the similar piece sold for last year. Later, the room is strewn with bidders paddles, empty coffee cups, and many tattered dreams of the bidders who wished to pay a price that somehow reflected some version of reality. The next weekend the headline reads, “Kind Of Famous Dead Artist’s Somewhat Famous Piece Sells For A Record $20MM”.
The question for us today is to decide what that all means. Is the piece worth $20MM? If it sold for $20MM, that means it must be worth $20MM, right? I don’t think so. Yes, someone parted with that sum of money to purchase that piece, but what if they needed to sell it again, would it be worth $20MM. There were forty bidders in the room who pegged the value at $11.25MM, and one who thought it was worth $16MM, yet it sold for $20MM. Is the piece worth $20MM? Or is it worth somewhere between $11.25MM and $16MM, the range where the masses found it acceptable?
This is, as you have already surmised, not a bit about art. This is a bit about the Lake Geneva real estate market, and at this point in time I’m seeing a rather incredible difference of opinion between buyers. The market is disconnected, and there are those buyers, a small percentage, that are out buying properties that are not proven by comparable sales, nor will they likely be proven in the near or far future. These particular sales are not sales for the masses, even when the masses are the one percenters considering an expensive lake house purchase. These deals represent outliers in our market, and rarely before has it been so obvious that most of the market has rendered certain properties unsellable, just in time for someone to come and buy it.
I have made a living hunting for value. My buyers are clients who seek value in their purchase, and the buyers that are currently working with me to find value have been experiencing some difficulties in that procurement. This is likely because the few deals that print outside of the realm of sanity cause feelings of uneasiness in the buying masses. The numbers can feel bubbly, too high, too random, and these feelings cause buyers to pull back, to wait for clarity. My perspective today is that the broad market is moving slowly, but purposefully, and the few sales undertaken by buyers that seek no basis for their purchase should have little effect on the psyche of buyers that continue to hunt for value.
If you’re a buyer looking for lasting value, you should be working with me. I know what an outlier looks like, and am wise enough to avoid them.