Table of Contents
Latest posts by Larry Rothman (see all)
- Understanding a Co-op Ownership Structure and Proprietary Lease - July 17, 2018
- New Construction Final Walk-Through Punch List - July 16, 2018
- Evaluating a Building’s Financial Statement - July 13, 2018
The Great Recession experienced last decade seems like a distant and unpleasant memory. As New York City home prices have rebounded, it might be tempting to forget about that unpleasant time. You should refrain from doing so, however. There are valuable lessons to be gained. As the saying goes, “Those who fail to learn from history are doomed to repeat it.” With that in mind, we set about reminding readers, so they do not get fooled again.
Image Via Flickr
Lesson 1: Use an exclusive buyer’s agent
Many buyers thought their agent was on their side. However, in reality, there might have been a dual agency. In this case. A buyer and seller had separate agents, but both worked for the same company. It was in their economic interests to obtain the highest price, and earn the highest commission. Even in cases where your agent did not work for the same real estate broker, he/she still wanted the highest price to earn a larger commission.
There is another way. An exclusive buyer’s agent owes his/her fiduciary duty to you, the buyer. This means the agent is legally obligated to help you obtain the best price, using information that is helpful to you (e.g. pending divorce situation) and conducting a thorough market analysis.
Lesson 2: Don’t let your emotions carry you
Many people get emotional when buying (or selling) an apartment. After all, it is more than walls and floors. It is a home. In the years leading up to the bubble bursting, many buyers wound up in bidding wars, paying far more than the fair market value.
There were several psychological reasons this was done. Buyers were afraid of losing out on a property, fearing the price on the next apartment would be higher. People did not want to lose, viewing it is a game. Lastly, some were emotionally connected to the property, getting that “homey” feeling.
Remember, there is more than one apartment for you. New listings crop up all the time. The best way to avoid overpaying is to have a budget beforehand and understand the current fair market value.
Lesson 3: Financing matters
It is important to look beyond your monthly payment and truly understand the loan terms. Many were suckered by a low initial monthly mortgage payment, only to discover the payment ballooned after the teaser rate expired for these adjustable rate mortgages. Lenders advised people not to worry, since housing prices always go up, and the principal balance could be refinanced. Other questionable financings were interest only mortgages. There were also questionable documentation practices, with loans made with little or no income and asset verification.
What can you do? Understand your mortgage options. In the wake of the aftermath, the Consumer Financial Protection Bureau (CFPB) was created. Certain protections were put in place to make it easier for you. There is a Know Before You Owe mortgage disclosure rule. Two forms are meant to be easier to understand than the four disclosure forms these replaced. This is the Loan Estimate form, which makes it easy to compare loans from different lenders, and the Closing Disclosure. You are required to have three business days to review your Closing Disclosure.
Lesson 4: Patience pays off
Many people that bought apartments in the years leading up to the recession saw large paper losses in the ensuing years. Granted, it is not easy to continue paying a mortgage on an apartment that has declined in value to the point where you have negative equity (mortgage balance is more than the apartment’s value). But, remember, it is not a loss until you sell. Provided you have the right financing in place and have done the proper budgeting to afford your place, the best thing might very well be to ride out the economic malaise. In order to pass muster with the co-op board, you had to show adequate reserves and assets, meaning you should be able to ride out the storm.
Generally, real estate is not a get rich scheme. Historically, over the long-term, it has risen at the pace of inflation. That is what you should expect, although it may be a bumpy ride in the short-term.
We hope never to experience such a severe recession again in our lifetime. However, the economy has been expanding for several years, and a recession sometime in the future is inevitable. Hopefully, these tips provide guidance in order for you to avoid making a costly mistake.