Archive for August, 2007
As the markets struggle to reprice risk and lenders make money harder to borrow, the level of awareness that there is risk investing in real estate is rising. Investors hoping to cash in on the opportunities which are being created will want to go back to the basics. The fundamentals are relatively simple and easy to understand. Most of the problems in the market today can be traced back to the point where leverage was used to purchase/refinance real estate without regard to cash flow and supply /demand principles. The leverage by nature increases the exposure to risk and as we are seeing that risk extends to the lenders and loan insurers as well.
When you borrow against an asset which can decline in value, you must have a plan to repay. Margin calls in the investment world are common and a normal part of every speculative investment backup plan. Selling at a loss to cover margin calls is also a normal part of speculative investing. Whether you are betting on long shots at the horse races, investing in the equity markets or real estate, the risk reward factor is always there.Those investors looking for large short term gains in real estate while it may be too late for many should have understood the risk. The idea that this is somehow new news or that people should not be expected to sell at a loss now is absurd. This reality will hold true for the first time investors with a single small vacant condo, just as it will for seasoned, well healed large vacant land tract speculators and home builders.