Top Real Estate Mistakes For 2005

In early 2005, we started to hear rumblings that the real estate bubble was about to burst. Some people believed the predictions, others did not, still others simply decided it did not apply to them. Many people went on about their real estate business as if the upward cycle would last forever, not accepting the historical fact that real estate -- like all investment scenarios -- is cyclical. What's in today is out tomorrow. Timing, as they say, is everything.

Based on the theory that you can learn from past mistakes, let's take a look at some strategic errors made during 2005 and see how they can be put to good use in 2006 and 2007.

Buyer Mistakes:

• Too Much Speculation. Far too many buyers purchased property with an eye toward flipping for a fast profit. Most of the time, these were people new to real estate investing who believed property was a sure thing and the way to quick riches. For a few it was! Unfortunately, what these amateurs are now discovering is that during 2005 they purchased property at the top of the market from more experienced investors who were actually exiting real estate in favor of other investment opportunities.
• Too Much Use Of Exotic Mortgage Instruments. An adjustable interest-only mortgage appears to have been the only way for some investors to purchase highly priced real estate during 2005. Many of these people now find themselves in a situation where prices may be declining, mortgage rates are adjusting upward, and payments against principal are non-existent. Coupled with rising costs for property and flood insurance in many markets, and you have a recipe for "foreclosure pie" in 2006. If I were a real estate investor today, I'd start making connections with real estate agents and bankers who can steer me toward foreclosure properties.
• Failure To Recognize Signs Of Problems. During 2005, many property sellers and developers started offering incentives for those who would "buy now". Free maintenance fees, bonus TV's, upgraded kitchen packages, price discounts, agent bonuses and the like are a sign that the market is softening. Incentives have always indicated languishing sales and a cooling of the market. In many areas, especially Florida, I'd look for more of these kind of incentives, especially in the condominium and townhome markets which may be becoming over-developed in markets like Miami, Tampa Bay, and Naples.
• Failure To Read A Newspaper. Too many people who bought property in 2005 apparently did so without reading a newspaper. Now, the buyers are all "up in arms" about the huge increases in property taxes and homeowner's insurance premiums. Both of these items were being discussed in newspaper editorial and business columns in most markets, especially in Florida and in other coastal states. Now, taxation and insurance are on everybody's mind as state taxing authorities, insurance regulators and private insurance companies greatly increase the costs associated with property ownership. Frankly, you were forewarned. If you chose to ignore the warnings and buy property anyway, you have nobody to blame but yourself. To be honest, I think this failure to act on information will increase the rate of foreclosure during 2006 and 2007.

Sellers

• Greed. Home sellers in 2005 over-priced property in record numbers and by record amounts. After seeing their property sit unsold for weeks and months on end, prices began rolling back as sellers realized that the 2005 marketplace was not the same as it was in 2004. This became more noticeable after June, 2005 in the Tampa Bay marketplace. Realistic prices based on comparables no more than six months old need to return as the basis upon which real estate values are determined. Arbitrary pricing based on ROI's needs to go by-by.
• Failure To Use The Internet. In 2005, over 70% of buyers started their home search on the internet before ever talking to a real estate agent. Sellers who hired a real estate agent who did not include a heavy internet presence in the marketing plan missed a major marketing opportunity.
• Market Savvy. Sensing a market shift beginning in the second half of 2005, buyers became very savvy. Sellers did not. Buyers began knowing the market and the competition for similar homes within their price range. Sellers failed to keep up to date on prices and competitive offerings and became "out of touch" with the marketplace. This lack of market understanding by sellers resulted in homes sitting unsold and sellers actually became the biggest obstacle to selling.

So, what does all this mean? I hope it means a return to some degree of sanity in the real estate market. Real estate for most people is nothing more than home-n-hearth. It's shelter from a storm, you're little piece of the American dream. When real estate becomes a commodity to be bidded upward by speculators for short-term profit, it's true value is somehow lost. Frankly, for the astute investor, 2006 and 2007 will likely be good years as they can take advantage of the mistakes made by others -- and plenty of mistakes have been made. For buyers wanting to purchase a home in which to live and raise a family, 2006 and 2007 should be a good time to make a long-term committment to a property with a realistic financing package. For those wishing to make a quick profit, I think your day may be done for awhile.

-30-