Finding and Solving 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.
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:
- A shortage of time by buyers, perhaps with the belief that they must move quickly to make an offer to buy.
- A desire by selling agents to close a sale.
- Assumptions that problems do not exist or are not serious enough to warrant a systematic problem solving attempt.
- Lack of expertise to find relevant and important problems.
Real Estate and Economics: A Fragile Combination
An Essential Dictionary
Just as it can be hard to watch a game or go to a play without a program, it will often be difficult to understand real estate unless you have this superb real estate dictionary.
The Tip of the Iceberg?
One reason I have ongoing questions and concerns about the recent and current financial crisis is the lack of genuine collaboration at the highest political levels to fix the mess before it gets even worse. Within the United States, there are simply not enough acceptable employment opportunities for those who really want to work. There has been one manufactured political crisis after another that does nothing more than postpone decisions that are critically needed.
At this point, both career and investment decisions should be made with the assumption that individuals will need to assume a much more active role in managing their careers and investments. The speed of change has accelerated during the past ten to twenty years in a way that clearly suggests that "it will never be the same again" in one area after another.
Do you doubt this? Do you really think that banks will ever return to the sound and stable financial state that existed before deregulation of the financial industry? I have worked with banks on behalf of small business owners for many years, and I have witnessed firsthand how most of the larger banks were changing their stripes well before the banking crisis. The surviving banks are now making much more money by controversial but profitable strategies such as financial derivatives and payday loans. Short of legal changes that will force them to give up risky practices, what will cause banks to act in the best interest of everyone else?
Similarly, do you think that all of those good jobs that went away during the past 30 years are going to magically reappear? It has become crystal clear that many companies are perfectly happy to make greater profits by cutting jobs, paying workers less and generally trying to squeeze suppliers to provide their goods at lower prices. Why should they worry about creating more jobs for the good of the overall economy? By doing so, they might actually decrease their chances of making more money by their current questionable practices.
One of the most important lessons that I think we should learn from all of this is the need to seek new and flexible solutions for all problems. This mentality has been a major part of strategies I have developed to cope with problems involving banks, real estate, businesses and careers.
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
A Systematic and Balanced Approach to Risk Management and Cost Control
The recent financial chaos that has 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).
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 non-fictional 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.
Elizabeth Warren Explains the 2008 Financial Crisis
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)
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?)
A Poll About Problems - What Is The Biggest Problem?
In your opinion, which of the following is currently the biggest real estate problem?
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.
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 the recent sustained downturn in both commercial and residential real property prices has 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:
- Real property is not so special as to be immune from problems.
- Just like many other complicated problems, difficulties involving property investments should be evaluated for possible solutions.
- The problems are frequently more complex than interested and biased parties will openly admit.
- Candid and practical solutions are often available from objective sources.
An Essential Investments Book
This is essential reading for anyone either wanting or needing a better understanding about real estate problems and solutions.
In the middle of March 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."
2014 Update: In the most recent bank stress test, 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. Too Big to Fail and Too Big to Jail seems to be alive and well in 2014, 2015, 2016 and beyond.
Doing what's right is seldom easy.— Janice Hardy
© 2012 Stephen Bush