Beware of the trap – Valuable tips for buying real estate

Buying real estate can become a gamble if you are not aware of the many pitfalls

When buying a car almost every buyer gets advice from an expert. When buying a property experts seem to have their say only in exceptional cases. During the last 30 years, about one million German citizens have had a de facto “junk property” sold to them as an investment, especially for old-age provision, which did not fulfil the promised increase in value.

Equity Trap

The price of real estate depends substantially on the performance of the local labor market. In addition there is the so-called bubble formation due to irrationally high demand or manipulated prices. At all times, no less than about 50 percent of the purchase price should be set aside as equity , because in a foreclosure about a third is lost in value

Fixed-rate trap

Insurance companies and banks like to count on fixed interest income. Therefore, a popular trap is to provide the investor with a fixed-rate loan that runs grace-free with final maturity of the entire amount. Almost always financial houses and mediators calculate a legendary fortune increase to the customer, which is to be read at most only in the small print. not rarely an insurance or financial-mathematical appraisal shows that that was unrealistic with financing model in the whole.

Risk Trap

Even the decision to commit  almost all of its assets long-term, with no short-term realizable reserves, can lead to insolvency. If capital is to be invested for smaller investments in real estate, in addition to very few solid open-ended investment funds, some cooperatives are particularly suitable, where three to five percent distributions have been the rule for decades.

Repayment Trap

Before making any investment, especially if it is partly on a credit basis, it is important to hedge the existential risks. Low interest rates can be a temptation if they are not fixed for a sufficiently long time and the repayment amount is too low. The traditional ploy of offering the customer a one per cent repayment in the last century meant the prospect of being finished paying off after 30 years. In today’s low interest rate environment, a one percent amortization is expected to take more than 45 years to pay off.

Total Surplus Trap

In many models, there is no expectation that the property will actually be acquired debt-free at some point. Rather, the prospect is held out that the property will be liquidated at substantial profits, calculated as an annual rate of increase on the twice-overpriced purchase price. What is overlooked is that real estate declines in value if left to its own devices. So selling the property will almost never yield what is needed to pay off the full loan .

Cost trap

Often advisers calculate that the dream rent can be used in full or with very low administration costs to service the loan instalments. Without repairs and maintenance as well as medium-term modernisation, a property will quickly lose value. In the calculations it is almost always forgotten that such costs are always necessary to ensure rentability.

Deadline trap

Advisor Trap

In many cases, financial advisors are motivated solely by commissions and bonuses. Warned by rulings on consultant liability, consulting firms today are often founded as limited liability companies only for the marketing of a property complex and subsequently liquidated: Here then often only individual consultants can be taken personally or the financing bank in liability.
Financial service providers can provide for follow-up business from the outset, for example by combining a life insurance policy with twelve years of savings with a loan for which the fixed interest rate expires after ten years. Such models lead to a jump in the burden of interest.
by courtesy of (Issue 3/2013)
Dr. Johannes Fiala and Dipl. Math. Peter A. Schramm

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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