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Real Estate; What went wrong??? October 5, 2009

Posted by shaferfinancial in Finance.
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This last week I heard several unfortunate stories from folks who are in foreclosure.  It seems to me that the lessons learned are not what most people think.  First, let’s throw some folks under the bus.  This is not an attempt to cast stones, only to really understand what happened to not make the same mistakes again.

There was a real estate bubble that was brought on by three groups.  The first were Realtors who keep pumping the idea that it is always a great time to buy real estate.  Realtors keeps preaching that they are the experts in real estate but, as a whole, failed to warn their clients of what was obviously an overheated, overpriced real estate market in most areas.  This failure brings into question the entire organization of real estate sales.  No way can they say with a straight face that they are/have looking out for buyers interest.  The idea of a buyer’s agent is bankrupt.  Realtors have proven they are sales people first and foremost and should be considered at arm’s length by consumers.  Whether they are worth the 6-7% is something folks are going to have to take a hard look at in the future.

Mortgage companies and their originators [including  mortgage brokers] bear their part of the  shame.  Mortgage companies have proven they will hire anyone to sell mortgages, whether the employees know anything about finance, or even if they have a history of financial fraud, consumer fraud or personal bankruptcy or foreclosures.  The end result is that the people giving mortgage advice, more often than not, will give the advice that suits their needs not their clients needs.  Most of the time they couldn’t give good advice just because they don’t have that knowledge.   No attention is given to whether the client will be able to pay the loan back, whether it is structured in a way that is positive for the client, or even whether the client is lying to the mortgage company.  This is a direct result of the hiring practices and the business model of the mortgage companies.

Wall Street finishes the blame game.  Much has been written about the collateralization of loans and the problems it caused so I won’t bang at this.  Let’s just say they made it all happen!

So what can we learn?  Well first of all let’s tell some truth here.  None of this would have happened if consumers demonstrated discipline and understanding.  But, we know that most consumers will never demonstrate those attributes.  But for the rest of us we can say this.  Before you consider purchasing real estate for a personal residence or as an investment do your homework.  Find out what comparable rents are.  Find out how much real estate in the area has risen/fallen in the last 5-10-20 years.  Check out the metrics that are important to your decision [schools, neighborhood activism, amount of rentals, etc.].  Don’t believe a thing the Realtor tells you until you have personally checked or have a history of working with this Realtor and know s/he is not going to lead you astray.  Find a mortgage person that will give you up-front pricing and then go to work for you to find you the best loan for your situation.  Find out what their background is and only work with folks that have a finance background with experience in structuring loans.  Remember all real estate is local and act accordingly.  There are great Realtors out there and well as great mortgage  originators.  Find them, but verify what they say until you have built up a working relationship with them.

Don’t buy into a bubble no matter what anybody says.  And here is the ultimate thought:  Real Estate whether it is to live in or as an investment is a long term decision.  Keep that in mind always.

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