Should You Really Trust Your Real Estate Guy?

After sharing my rent vs. buy calculation method a few weeks ago in Part 7 of my housing series, I feel ready to once again tackle the Canadian obsession with housing.

In this post we will look at incentives. One thing I love about math is it takes emotions out of decision making. It doesn't matter if that's trading, investing, saving, or buying.

Over the years, I've personally found people with a vested interest in housing—like your local real estate seller—love to stoke your emotions. Fear of loss, promises of riches. This emotional language is designed to prevent you from making good decisions. Irrational decision-making results in a transfer of wealth from your bank account to another.

Remember that greed and fear we talked about in Part 4?

Incentivized to Line Their Pocketbooks

In every decision-making process, every research piece, or every political decision, it is important to sniff out incentives. This is because incentives powerfully influence people's decision making and beliefs. Ask any economist or marketer—it's all they do.

If you were to ask your real estate seller about the current state of your local housing market, there's a really good chance they would tell you it's a great time to buy. If markets are high, it's a great time to buy because prices are going up; if markets are dropping, it's a great time to buy because houses are "on sale". To someone collecting a hefty commission, the market is always best for buyers.

If you were to show a real estate seller a quick Moose Math rent vs. buy calculation, I can guarantee they will try beat it down any way they can think of. Terms such as historical returns, equity building, security, stability, future, and investment would flow like the Ganges—relentless and polluted.

The incentives for real estate sellers to work in housing-obsessed markets with drool-worthy price increases and panicky buyers are huge! Every time a property title changes hands, 4%+ of the purchase value is up for grabs in commissions!

Panicky buyers are fantastic clients; they are quickly sucked into deals, easily coerced and misled, and rarely back out of deals. In the hottest markets, most buyers are even skipping on home inspections (aka: deal busters).

Why work in a balanced market where people take their time to look for the biggest purchase of their lives and deals fall through after home inspections when you earn thousands effortlessly selling houses in hours?

As a "real estate professional" you don't even need to know the home's real value in a hot market. It doesn't matter to hordes of salivating buyers eager to part with their hard-earned money and enter a debt spiral that will drag them down financially for the rest of their lives.

Your local real estate team is powerfully incentivized to look out for #1. They stoke the real estate fire because it's really really good for them. Be very careful trusting what they say!

Insane Leverage Means Exploding Prices

The entire housing game is incredibly shady. Only in real estate will an agent (who's supposed to look out for your best interest) tell you to buy overpriced assets at 19:1 leverage ratios (5% down). Then they have the guts to confidently tell you it's a good investment.

If you turn around and sell the "investment" tomorrow, you're already in the hole. The broker will take the first 4%, the bank will charge you break fees, and CMHC will still take their cut for insuring your brain-dead decision.

If the value of the house ("investment") drops even 10%, most Canadians would be financially ruined. Leverage always increases risk, but 19:1 is fatal. In the history of our country, home prices have dropped 10% or more on countless occasions in various local markets.

These sky-high leverage ratios are part of the reason why house prices are so high. Friendly Canadians who can barely scrape together enough cash to pay their monthly bills are piling into houses they can't really pay for. It's all good when prices are increasing, but it's a true financial disaster when prices slip.

If these buyers can't save for a downpayment on their own, I can't wait to see what happens when the roof needs replacing, the washing machine breaks down, or the furnace goes kaput. I'm sure they're not putting aside their $5,000 a year for maintenance! Nevermind retirement math...

They say don't ask your barber if you need a new haircut; I say don't ask your real estate seller about houses. These so-called professionals are not incentivized to look out for you. Period. No matter how the industry portrays themselves in constant ad campaigns, they are simply salespeople looking for their next huge commission. You need to do the math and consider the real incentives every time.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.

Leave a Reply

× six = thirty