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Finding and Solving Real Estate Problems

Updated on December 11, 2017
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Stephen Bush is a real estate expert. He is the CEO and Founder of AEX Commercial Financing Group.

Real Estate Problems
Real Estate Problems

Real Estate Problems and Solutions

Real estate is currently well-known for a whole series of problems. Several aspects of the industry are in need of or have already used some form of a "life preserver." I will talk about some of those here while also providing equal time to evaluate the possibility of real estate solutions. After all, the best kind of real estate problems are those that can be prevented, avoided or solved. Both problem-finding and problem-solving will receive my attention.

I have been involved closely with both the real estate industry and small businesses for over 30 years. There are many lessons to be learned from these experiences, and I will be sharing some of them with you here.

The truly dangerous thing is asking the wrong questions.

— Peter Drucker

Solving Real Estate Problems

Problem-finding Must Happen Before Problem-solving

The need for a comprehensive problem-finding effort is often overlooked in attempts to solve real estate problems. This can occur for several reasons such as the following:

  1. A shortage of time by buyers, perhaps with the belief that they must move quickly to make an offer to buy.
  2. A desire by selling agents to close a sale.
  3. Assumptions that problems do not exist or are not serious enough to warrant a systematic problem solving attempt.
  4. Lack of expertise to find relevant and important problems.

A Relevant Quote About Problem Solving

"All problems become smaller if you don't dodge them but confront them. Touch a thistle timidly, and it pricks you; grasp it boldly, and its spines crumble."

(Admiral William F. Halsey)

Costs and Risks versus the Benefits

The recent financial chaos that directly impacted real estate seems to have exposed problems that many parties conveniently ignored for so many years. In several glaring examples, these problems take the form of operational and financial risks. Whether they are referred to as "problems" or "risks," these factors should not be overlooked for any reason by buyers (including the four rationales shown above).

A Systematic and Balanced Approach to Risk Management and Cost Control

For too long the common wisdom seems to have been "You can't lose money with real estate." This perspective placed far too much of an emphasis on potential benefits in buying real estate and minimized costs and risks. The time finally seems ripe to treat the risks and costs as elements that can easily outweigh potential benefits. In other words, there are real risks and real expenses that must be examined in a balanced comparison of costs versus potential benefits. To make this cost-risk-benefit analysis even more complicated, the time line varies for these factors. Especially problematic is that many of the potential benefits (such as appreciation in value) do not kick in for several years while the risks and costs can materialize much more quickly.

Reverse mortgages are another festering problem in Washington. It's enabled by the U.S. government. They're a "problematic" product for everybody -- the consumer and the mortgage servicer.

— Chris Whalen (The Daily Ticker: Reverse Mortgages a "Festering Problem" Enabled by Government)

Always a Wise Strategy: Improving the Bottom Line

A Poll About Problems - What Is The Biggest Problem?

In your opinion, which of the following is currently the biggest real estate problem?

See results

In one slick TV spot after another, reverse mortgages are touted as an easy means to a carefree lifestyle. Actor Robert Wagner, Henry "the Fonz" Winkler and even former U.S. Sen. Fred Thompson assure older homeowners that they can "live a better retirement" with a reverse mortgage. But what the ads don't show is the heartbreak that these complex loans -- which allow homeowners to convert part of the equity in their homes into cash -- have brought to a number of homeowners.

— Carole Fleck (AARP Bulletin: Are Reverse Mortgages Helpful or Hazardous?)
Stress Tests for Banks
Stress Tests for Banks

Bank Stress Tests and More

During 2012, there were two glaring examples of how fragile the financial environment continues to be. First, the Federal Reserve conducted a "stress test" of the 19 biggest banks to measure their ability to withstand future economic volatility. Four of these banks (21 percent of the group) flunked the test. Understandably various banking people tried to spin this as a positive outcome, but in my view it is not a good thing at all when 20 percent of the biggest banks fail to measure up to this kind of assessment. Second, a Goldman Sachs employee (Greg Smith) talked about the "toxic" and "destructive" atmosphere at his (former) company in which corporate efforts to make money have routinely sacrificed the interests of their clients (apparently referred to as "muppets" by this caring firm). According to Mr. Smith, "Not one single minute is spent asking questions about how we can help clients."

In the 2014 round of bank stress tests, five of the 30 biggest banks (17 percent) flunked. The number would have been well over 20 percent if some banks (including the Bank of America) had not been allowed to adjust their capital structure retroactively. For the first time since the recent financial crisis began, all major banks passed the bank stress tests during 2017.

Solutions

Solving real estate problems is (and always has been) complicated. None of this is meant to suggest that a meaningful assessment of expenses and risks is itself a problem. It is in fact one of the primary solutions.

Avoidable Business Writing Problems

Real Estate Changes are Complex

Location, Location and Location Gets a Needed Facelift

Real estate was never as simple as the "experts" suggested. The "get rich with other people's money" books and seminars have finally been exposed as oversimplified money-making ventures for their sponsors.

One of the prime examples of oversimplification is "location, location and location," the overly cute and oversimplified answer to the question, "What are the three most important factors when buying or evaluating real estate?" As a result of this particular slogan, many buyers wrongfully assumed that their purchase was sound so long as they chose a good location. It is certainly true that location cannot be overlooked if for no other reason than real estate is fixed in its geographic position. But events during the past 10 years have clearly illustrated that location is no guarantee against capital losses.

Many of the investment principles that were believed to have applied to real estate were in fact only applicable so long as real property prices kept going up. While it seems to be accepted as normal that economic cycles have ups and downs and flat periods, it was repeatedly suggested by many that real estate was somehow different and not impacted by "external" changing conditions. Many of these changes had an immediate negative impact on the health of real estate. While some of the changes are relatively temporary, several of these real estate changes will have a continuing effect for the foreseeable future.

This does not mean that real estate should be avoided. The lessons to be learned from recent difficult circumstances should be some variation of the following:

  1. Real property is not so special as to be immune from problems.
  2. Just like many other complicated problems, difficulties involving property investments should be evaluated for possible solutions.
  3. The problems are frequently more complex than interested and biased parties will openly admit.

Better Business Writing Is Part of the Solution

Doing what's right is seldom easy.

— Janice Hardy
Remember Plan B
Remember Plan B

© 2012 Stephen Bush

And now, your thoughts on the subject...

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    • profile image

      dichvucai 3 years ago

      @Jimcalagoure: hope the real estate market will warm up.

    • profile image

      Jimcalagoure 3 years ago

      For me its the bad analysis and strategy. Many realtors used to invest heavily blatantly in expensive equipment in a race to complete the project ASAP and start with another. But in due time they tend to miscalculate and gets into the debt that may ultimately result in closing down of the business.

    • profile image

      anonymous 4 years ago

      It sure is good to have experts to explain all this and as usual you teach with excellence! The sun will come up tomorrow.... :)

    • emilysmaids profile image

      emilysmaids 4 years ago

      Wait I thought we were going to blame it on the appraisers ... *whistling*

    • srsddn lm profile image

      srsddn lm 5 years ago

      I think recession is the story, more or less, in most of the countries.

    • profile image

      new_westminster_curser 5 years ago

      The opposite is true in Canadian real estate, the market has been great up here!

    • AstroGremlin profile image

      AstroGremlin 5 years ago

      It's always a terrible time to get into real estate. Except in hindsight. Historically it's pretty forgiving but always fraught with problems. It always takes courage and a willingness to face problems. Until the years pass and prices go up, and the problems are remembered as funny stories.

    • Lady Lorelei profile image

      Lorelei Cohen 5 years ago from Canada

      I think that the current economic crisis taught us all some very valuable lessons. Presuming real estate is always a wise investment was one of those. You have analyzed it well.