Despite the downward trend, real estate is still insane in Canada. To be honest, I haven’t been paying much attention to the headlines as of late, but it seems like everyone is a real estate expert these days. Talk to any homeowner, and they’ll tell you about how much their homes have gone up in value while realtors are more than happy to talk about how real estate is a can’t miss investment.
Wait a minute, are realtors all of a sudden financial advisors? How can they possibly say real estate is a can’t miss investment? Well, there are no laws saying they can’t make such statements, so they’re not doing anything illegal. But that doesn’t mean you should think they can accurately predict the future or treat them like a certified financial planner.
Full disclosure, I used a realtor when I bought my home, and I like him a lot. I trust him for all of my real estate needs, but I would never turn to him (or any realtor) if I needed advice about investments, here’s why.
Realtors are paid to sell
In most cases, when a home sells, 5% of the sale price is paid out to the realtors. 2.5% goes to seller’s agent, and 2.5% goes to the buyer’s agent. The higher the selling price, the higher the commision that is paid to the realtors on either side. If the realtor represents both the buyer and seller, then they get the full 5%. You can see how this is a conflict of interest.
Now if you’re the buyer, it obviously benefits the agent if you spend more when buying a home. I’m not suggesting that realtors purposely encourage you to spend more, but they do have a natural incentive. Some realtors will tell you that spending more is just a few dollars per month. Seriously, have you seen those home buying shows on HGTV? The first question they ask is “how much can you afford a month?” and almost always, they still go over budget. Yes, it’s just a few more dollars or a “cup of coffee a day,” but you’ll end up paying thousands of dollars more when you factor in the interest.
They can’t predict the future
Some realtors look at how the markets have been doing over the years and suggest that the real estate will never go down or this investment will be worth much more in the future. This may or may not be true, but it’s impossible to make that guarantee. Certified financial planners aren’t allowed to make such claims because they’re regulated, but realtors can. That doesn’t make any sense, does it?
Realtors can accurately (usually) assess the current market conditions and give you their recommendations on what specific homes are worth and what they may sell for, but they can’t predict the future. No one can. Unless you’re buying an investment property, you should think of your home as a place to live. Don’t focus on future value, think about what you can afford now.
They don’t know your financial situation
Generally speaking, there are only two things your realtor will know about your financial situation: How much you are approved for your mortgage and how much you can “afford” on a monthly basis. A good realtor will, of course, tell you to set aside some money for closing costs and furniture, but they likely won’t know what your overall financial situation is.
Realtors aren’t thinking about your other debts, the cost of raising kids, how you’ll pay for your vacations, or if you’ll have enough saved for retirement. They’re focused on helping you buy or sell your home (which is their job). When working with a realtor, you need to know what you can realistically afford and to stick to your budget. It’s not fair to expect your realtor to know how your home purchasing decision will affect your overall financial situation. That’s your job!
It may sound like I’m hating on realtors, but I think they can provide excellent insights in their field which is real estate. You can trust your realtor when you’re buying and selling a home, but don’t go to them if you’re planning your financial future.