Wednesday, November 25, 2009

Thank You Global Recession


So, the recession huh? It’s been crappy. It’s been hard. People have lost jobs, loans, homes, and life savings. Real Estate, as an industry, was hit particularly hard (just because we may have started the crisis doesn’t mean we can’t lick our wounds too) with thousands of unsold homes languishing on the market, prices falling, developers losing entire buildings and being responsible for personal guarantees, companies going out of business, and non-existent commissions being all too common. I don’t think there is anyone who doesn’t want this to be over…pronto! But in the spirit of thanksgiving, I would like to take a moment and discuss 5 reasons why I am thankful that I have worked in the Real Estate Industry during a recession (let’s just hope I don’t have to go through another one).

Thank you recession for reminding me:

1. Location is King…again
It may be the first lesson of real estate, “location location, location” but it took a global recession to remind the industry that “if you build it, they will come” should only work in movies. Gentrifying neighborhoods is a process; it takes time, and evolves naturally. You can’t just enter a pioneering neighborhood, slap up a condo building, and expect to get a $1,000,000 for a studio. Conversely, buyers – before you buy an “investment” home think to yourself – “would I live here?” and “am I going to live here?” If either of your answers are no – DO NOT BUY – go back to the Upper West Side where you belong and where there will always be a market for your home.

2. You Can’t Always Get What You Want
When the financial industry started giving out mortgages like candy people forgot that not everyone can afford a million dollar home. Yes we all want one. I personally want an $8,000,000 one at 1055 Park Avenue but that doesn’t mean I can have it. No doc loans, lenient regulations, and creative financing made us all feel like millionaires. But ask anyone who is now struggling to make a mortgage payment they can’t afford, or whose falling home prices has gotten them into an upside down situation and they will tell you that it’s not worth it. The recession has reminded us that it’s time to get back to basics, it’s generally accepted that your housing costs should be no more then 30% of your income (http://www.lendingtree.com/smartborrower/saving-money/managing-your-money/budget-rules-of-thumb/). Remember that number and buy a dream home you can actually afford.

3. Read the fine print.
Buying in new construction presents risks that are different from the risks you assume when you purchase in a coop or buy a single family home. In a new condo there is no problem with board approval, old furnaces needing to be replaced, leaky septic tanks, giant lawns that need mowing and don't care that you don’t own a lawn mower, and who knows what other surprises you will find in the attic, basement, buried in the yard etc. New construction carries its own risks including construction not being completed, re-assessments of common charges or operating budgets, and the developer holding onto homes making your neighbors renters not homeowners. The thing about new condo buildings, at least in New York, is that their offerings are regulated by the Attorney General. This means when you buy a home, you get a giant legal document that addresses every possible risk that could come up when buying your new home. It also, gives you recourse if things don’t go your way. The AG is almost ALWAYS on the buyer’s side – remember The Rushmore? (http://therealdeal.com/newyork/articles/buyer-sues-gary-barnett-extell-for-1m-deposit-at-rushmore). So what did the recession teach us? Read the damn offering plan. Every word of it. Understand risks before you take them so you can make an educated decision.

4. Don’t buy at retail
When the market was overheated people were bidding up prices, buying homes after triple digit price increases, and generally purchasing with exuberant disregard of price. The recession has put buyers’ feet back on the ground while simultaneously bringing developers to their knees. Ideally, things will end up somewhere in between what was and what now is. But what we can’t forget is that negotiation is a good thing. It allows both buyers and sellers to split the power during the transaction and in a successful negotiation, leave the table feeling satisfied. It’s a win/win and it’s how markets operate in most other countries and how it should work here too.

5. You got to know when to hold ‘em
Real Estate, like all markets, is cyclical. It is not always going to be up and it’s not always going to be down. Be patient, be educated, and make sure you are in a position to wait out a storm. Economists are forecasting that the pace of economic cycles is increasing – meaning we will have shorter periods of boom and bust and will experience both more frequently (http://ideas.repec.org/p/nbr/nberwo/4005.html_). Let’s hope it doesn’t get this bad again, but let’s prepare for the fact that it probably will.



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