Nasa Astronauts are famed for their understated call back to the base in Huston saying 'we have a problem' when their space craft is failing and they are about to die.

There is an equally serious problem that affects the world of investment and property investment that is generally treated in an understated fashion. It is called the Agency Problem.

One of the sharpest investment thinkers on the Agency Problem is Warren Buffett and he said, "Wall Street's enthusiasm for an idea is not proportional to its merit, but rather to the revenue it would produce"

Likewise, applying Buffett's thinking to the property world; "the enthusiasm for BMV or 'Why NOW is the Time to Buy' property advisors and brokers is not proportional to the merit of the opportunity, but rather to the commissions it would produce".

Hence, we have an agency and a principle problem. The agent is the person who earns a percentage of the transaction and the principle is you, the investor, who pays for the asset and meets the brokers fees (either by a direct fee payment or a price inflated to include a broker commission).

Buffett is a great critic of Wall Street, just as Property Secrets is a critic of 'pile 'em high, sell 'em cheap BMV' dodgy dealers.

And, if any investor is still objecting, 'what's wrong with a deeply discounted property deal'? Let's turn to the Buffett's experience again. He says:

"I spent 20 years searching for bargains and I had the misfortune to find some!"

The turn around in Buffett's investment thinking after 20 years, which then rapidly drove forward his investment success, was that he stopped looking for average businesses at a cheap price and started to look for great businesses at a fair price.

In other words, he rejected the 'discount, discount, buy now, never been cheaper, BMV, below market value' cry of the traders from Wall Street, and turned instead, to look for great businesses.

In a similar way, property investors will make more money, just as Buffett has, by turning away from the discounts and looking for great property investments at fair value.

That is not to say that Buffett does not look for a good price - he does - and so should you. Instead, what has changed is HOW he looks at investing. And it is this subtle but critical shift in thinking that we can follow and apply in our individual property investments.

Sounds easy so far, right?

Well, of course it's not. Buffett, a smart man with a pedigree in getting the best investment mentors and a track record of success, admits he spent 20 years - that's half a working life time - following a flawed investment strategy.

The reason he took so long to shift his thinking is not because he wasn't smart, experienced or that he didn't have access to the best investment thinking; it is because thinking in this non-conventional way is very hard to do.

At least, it is easy to say you'll do it, much harder to stick to it - especially when your BMV broker has just put a corker (apparently) of a deal under your nose.

So, where do Wall Street and your property broker come into all this?

Well, your incentives as an investor and his/ her incentives as a broker are different and may well be in conflict. Here's how Buffett solves this problem...

Buffett takes a long term investment perspective - he can afford to because he owns great businesses and great assets. This means that he doesn't buy very often and he doesn't sell very often. This is bad news for Wall Street,

Wall Street only earns a fee when the asset is bought or sold. And, of course, the government only gets its taxes when you buy or sell too!

Buffett says, often the smartest investment decision you can make is to do nothing. He says "inactivity strikes me as intelligent behaviour".

So what happens to your property broker if you are inactive? Easy, he starves. And are the best and most persuasive brokers going to hang around and starve? Heck no, so they drum up some new idea for rubbish property sold at a discount and give it a sexy label and get the sales rolling again. The latest fad is 'fractional share' property - previously known as Time Share.

This is why there is an Agency Problem. It is not that all deals are bad - some are, of course, very good. Buffett after all, does buy a great deal of stock (and he sells some too), but the point is that the broker will always be at risk of tempting you to buy more or buy faster than might be in your best interests.

Can you blame the brokers?

No, for sure you can not blame the property brokers. If it were not for brokers, we would not have a property business and none of us could invest in it.

And, broking deals is hard work - brokers often deserve the money they earn. Buffett himself has willingly paid many millions to banks and brokers for the services they provide - so there is no problem paying them.

It is just that as investors we need to remain alert to the Agency Problem - because it isn't ever going to go away. And, a critical factor in your investment success is your ability to pass up on the exciting big discount deals that are too good to be true and stick to a path of quality investments at fair prices.

Can anyone else offer a solution to the Agency Problem?

No.

Many commentators thought the credit crunch would teach banks to be more sensible and somehow solve the Agency Problem. As Martin Wolf says in the FT, he thinks this is now unlikely.

Equally, here at Property Secrets, we offer a service to review potential investments that investors are going to make - before they make them. And guess what? Only a few investors take us up on the offer - even though we have no axe to grind in terms of whether it is a good investment or not. Investors, at the point of buying, often seem to have already made their mind up and certainly don't want to get independent advice.

This has been an interesting experience for us and tells us that the Agency Problem is as much to do with buyer behaviour as it is to do with broker behaviour.

So, no, please don't blame the broker - but just be on the look out for your OWN behaviour and notice when you get too exciting or tempted by something that looks just too good to be true.

One last thought - live property deals?

The internet has promised to break up the agent/ broker structure around property for many years. To date, this has not happened. Still, many new businesses have been launched which aim to do this in some way.

For instance, self-selling and self-renting websites now fill cyber space. Do investors use these? If not, why not?

And, if not, is there a better way? We have seen and are attracted to a business plan for a new property start-up that allows owners (or brokers) to pitch their properties or deals to a room full of property investors. We think that this might address many of the issues that relate to the Agency Problem.

The idea - a sort of cross between dragon's den and a traditional property auction, has individual owners or brokers pitch their property deal to potential investors. The seller/ broker and the investor would pay to attend the event, thus, there is no agent over-selling the property and the investor is allowed to make contact with more than one seller and agree his own price and terms.

The key difference with this method of investing is that each broker or seller needs to compete with the other deals in the room. In addition, each deal presented can be questioned by other experienced investors - which is a great way to learn, for the less experienced.

The mildly competitive nature and public presentation is expected to not solve the Agency Problem, but at least improve the odds of a decent opportunity and save investors from the worst deals.

Take a look at www.propertydeallive.co.uk

But will it work?

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