Know what you don't know about real estate.
Discard everything you know about real estate. Just throw it over here in a pile. We’ll burn it later.
Release all your preconceptions about real estate. Just let them go. Forget everything you’ve ever heard or read. Let it all go, and float with me. Float, float with me, float toward the bliss that is today’s informed real estate consumer.
Let go and you’ve floated over your first and most important hurdle. Because nothing has prepared you for the buying and selling of real estate.
If you think I’m trying to scare you or, worse, patronize you, think back to the last million or so daily transactions you’ve had. None of them prepared you for the parallel universe of real estate. In fact, they did just the opposite.
First, you’re used to walking into a store and seeing merchandise with its transaction price clearly marked. You'll pay that price if you buy at that store. If you think the price is too high, you don’t bargain with the owner or salesperson. You go to another store (or Web site).
In the successfully-executed retail transaction, your relationship with the salesperson is light, brief and casual. As a customer, you’re always right, or at least always entitled to being humored, or at least always entitled to pleasant service. The relationship between you and the retailer isn't overtly adversarial. The salesperson is unchallenging, always at your side, always on your side in appearance if not in fact. You share a common goal: you, walking out of the store feeling good, or at least not feeling like you’ve fought your way through every major campaign of World War II.
The rough edges—the unpleasant intellectual, ethical and emotional challenges that lurk beneath the surface of any commercial transaction—have been carefully and expertly smoothed off for your shopping comfort and convenience. I’m not forgetting the cat-and-mouse games that can go on between customer and salesperson, but these games aren’t exclusive to retailing. The experience a la Nordstrom, or whoever prides itself on outstanding retail service in your area, is as close to a no-brainer as a century of modern retailing can make it. If not, you go where it is.
Now let's trade the streamlined, sanitized environment of Western-style retailing for a commercial exchange in a country with a very different culture. You go down to the zocolo, the local marketplace, where tourists haggle with shopkeepers over souvenirs. Immediately you notice that the prices aren’t marked. So what’s this stuff really worth? Are they trying to pull the wool over your eyes? Price tags take the guesswork out of the transaction. And sure, you could pay what the shopkeeper asks, but only touristas do that. You don’t want to pay too much, but you don’t like haggling. You’re uncomfortable, out of your element. And the further you stumble into this unfamiliar commercial system, the more adversarial it gets. Now the shopkeeper is gesturing and shouting, ticked off by your ham-fisted attempts to beat him down—or is this just part of the game?
Even if you do like haggling, you don’t do it as well, in your one day in the village marketplace, as locals do every day. You may speak the language of the country but not that marketplace. You don’t know the elaborate and valuable rituals the locals have refined over centuries to get what they want through hard bargaining yet maintain the essential veneer of civility. You may not even know that such rituals exist, or see the need for them. In fact, you don’t need the rituals of bargaining in your normal life. We haven’t needed to do “good old-fashioned horse trading" on a daily basis since horses were the backbone of transportation.
But hey, the village marketplace offers minimal financial risk. So what if you pay $5 for a carved onyx bowl that’s only worth a buck? Or if you pay $100 for a genuine 1500-year-old artifact that was carved last week. You don’t call your attorney.
Let’s bring it back home now, back to modern Western-style commerce, but with an example that offers far more risk. Ever bought a car at a dealership? Probably, and you grind your teeth just thinking about it. Yeah, the prices were clearly marked, for what that was worth. You still weren't sure what the car you wanted was worth. The sticker price? Less than sticker? How much less? More than sticker? How much more? And now we’re talking big money. The average new car costs about $28,400 these days. Even if you paid just 5% more than market, that’s still a big financial misstep.
Sure, you tried to bargain with the salesperson, and maybe the manager, and maybe even with some shadowy figure one step up from the manager who you never saw and may never have existed. Maybe you even threw facts and figures at them. But eventually they wore you down, you wanted the car and, intuitively if not consciously, you knew you were fighting a losing battle on unfamiliar ground. These people knew all the rules of the game, as only the people who live those rules every day can. You didn’t, and you never will unless you start selling cars yourself.
Not me, you say. I got a great deal. They were offering a rebate on the car I bought, and I got $1000 off the sticker price. I feel good. I hate to burst your balloon, but by measuring your success against the sticker price, you’re playing the game by your opponent’s rules—and that’s never a good thing. You’re using a number the other side created, not as a helpful indicator of your car's worth, but to artificially position their product in the marketplace. They didn’t just pull that sticker price out of a hat, but they might as well have as far as your car’s market value is concerned.
Let’s say the car you bought stickers at the same price as a BMW 525. You got $1000 off that price, so you got a car that’s just as good as a 525 but for $1000 less than a 525, right? That’s a good deal, right? No, what you got is a car that the car-buying public, in its unbiased collective wisdom, won’t pay list price for because it knows that your car is inferior to a 525 by at least $1000. So that $1000 rebate didn’t make your car a bargain. It just lowered its price to the amount enough people will pay to get sales back up to where they need to be. And you probably could've gotten the car for even less than that, because a rebate rarely trims all the fat off a pumped-up sticker price.
Tricky, huh? That’s because we’re still in the parallel universe we stepped into, Twilight Zone-style, back at the village marketplace. We’re just in a slightly evolved, highly refined form of that marketplace, thanks to the untiring efforts of the lawyers and legislators. Now we have prices that are clearly marked. But they’re meaningless. We still don’t speak the language or know the rules, and we still have a jungle of nuances to hack our way through before we reach our goal.
We’ll stay in this parallel universe from now on because (drum roll, please)…
Buying and selling a home is just like buying a car, only more so—way more so. Way way more so.
And the stakes are way way higher.
Okay!!! No pressure, right? We have big money, strange rules and, for bonus points, maybe the chance to prove what a great wheeler-dealer you are. No wonder you’re nervous. You should be.
Speaking of pressure, at this point it’s customary for real estate advice-givers to solemnly intone (think NFL Films voice-over) that “buying a home is the biggest investment you’ll ever make”.
I couldn’t disagree more. That’s not helpful advice. In fact, it’s just plain wrong.
Think of your home as an investment, as just another way to grab the brass ring, as a pinball machine you can light up with a few skillful nudges—and you’ll screw up. I can just about guarantee it. Real estate is bigger than you and I. The real estate market goes where it wants, sits where it wants, and doesn’t ask or tell anyone when it does.
So forget those economic reports and studies you’ve been reading. If the Ph.D. economists can’t agree on what caused the signal event in their field, the Great Depression, then the “dismal science” is indeed dismal but less than science. The only good thing about seeing economists fall over themselves to explain real estate is that they’ve made it clear, even to a layman like me, that not only do they not know what’s going to happen, they don't even know what did happen. Is there a bubble in real estate? Definitely yes! Definitely no! You choose, and I’ve found that our choices follow our habit of seeing the glass half empty or half full. So we’re back to basing our choices on the biases and subjectivity that science supposedly excludes.
If the experts don’t know where real estate is going, go with your gut. Simplify simplify simplify. Buy when you can. Sell when you need to. Don't make it more complicated than that. Don’t try to work the angles of real estate; virtually all of them are illusions. Instead, think of your home as an asset that gives you a roof over your head and is often happy coincidence! the biggest factor in your accumulation of wealth. Then you’ll have a healthy, rewarding attitude toward real estate.
Because now you’re in the big leagues.
Buying or selling a home is likely to be the biggest, most challenging transaction you’ll ever attempt. Lawyers, legislators and escalating prices (and, lately, declining prices) have made real estate seriously, bewilderingly complex. The bigger the numbers, the more complex a transaction will be and the more complex it should be. More details, more nuances, more legal and financial pitfalls and pratfalls. More ways for you and everyone else involved in the transaction to just plain screw up.
Every year your state legislature passes what I call “The Real Estate Agent Full Employment Act”, yet another set of regulations adding yet another layer of complexity to an already-complex transaction. Every year the courts do their part by shoveling on another layer of case law.
Good or bad, necessary or not, this gradual accretion of law to real estate is inevitable. Why? Because every year, real estate takes on more mythic proportions. Every year, law schools graduate more lawyers needing suits to plead. For years, home prices rocketed up faster than income, and they still do in some areas. Every year, we feel more entitled to the perfect, risk-free real estate transaction.
That’s why I shake my head when I hear buyers and sellers who didn’t use an agent blithely say, “It was simple”. It’s not supposed to be simple. The law says the real estate transaction is complex and adversarial—one arena, two parties, each with conflicting needs and goals. “It was simple” in your case only because one or both parties left out something important. Someone gave up a right or a bargaining chip they didn’t even know they had. It’s a little like showing up for trial with a public defender who falls asleep in court, then wakes up long enough to have you cop a plea. You get slammed with the maximum sentence and walk out saying, “It was simple!”
Am I saying this just so you’ll run screaming into the arms of the nearest real estate agent? Not necessarily. The complexities of real estate are beyond the grasp of even some agents. This makes it all the more important that you know what you don't know, and that you pick the right agent. Pick the wrong agent, and your agent will be part of the problem.
So know what you don't know about the village marketplace. Know that just any agent may not know enough. But know enough to believe the good agent when he or she tells you what you need to know.
Know that it's that simple.
Next, The real estate business model, part 1: friend or foe?