Let me tell you kids about the average real estate buyer.
This person, likely buoyed by hours and hours of the kind of experience one can only get watching HGTV, thinks they know everything. They’re able to identify a kitchen that needs remodeling a million miles away. They know if that flip is going to be a flop (spoiler alert: it never is). And they sure as hell can tell which house those pesky House Hunters are going to choose.
There’s just one problem. The lessons on HGTV don’t translate into the real world.
A recent example
I recently met with a woman who wanted some private mortgage financing. Most people who come and talk to me are looking to borrow against a house they already own. This woman was looking to buy a house. She had a minimal down payment with the plan to either a) take out a loan to make her application at the bank seem better or b) have me finance 98% of the value of her new property.
The more I talked to her the more it was obvious she had no idea about the actual nuts and bolts of home buying. She couldn’t understand why I was saying no. I explained the concept of equity and just how much equity I needed as a margin of safety. I would have had more luck if I was talking to a nine-iron.
What came next was equally shocking and hilarious. I asked her if she had a house picked out yet.
I hit a nerve there.
What came next was a five minute story about how she was “forced” to buy privately by several local Realtors who REFUSED to show her houses? The reason? Each asked if she had been pre-approved for a mortgage. When she said no, they all told her to pound sand.
She then found a private seller who would sell her a place for $120,000. This was the house she wanted me to finance.
I did a little research after she left. It turns out the property had been previously listed for months before the frustrated seller took it off the market. The list price?
That woman needed a Realtor. She would have gladly overpaid by 33% doing everything herself.
Professionals are a mixed blessing
Before y’all accuse me of being pro-Realtor, I fully agree with the all the negatives.
Most Realtors don’t care about getting you the best price. They care about getting the deal done. There are a lot of semi-competent real estate “professionals” out there, too, who find ways to screw deals up. And we’ve all heard the stories about crooked Realtors who actually try to steal from their clients.
I get all that, and I do firmly believe a well-educated home buyer can do just as well on their own.
The key word there is educated. The average home buyer doesn’t know anything about houses.
It’s the same thing with investment advice. I firmly believe the average reader of this here blogening can build their own portfolio of ETFs. I think they can even pick individual stocks if they acquire the needed knowledge. But we are not representative of the population as a whole. Not even close.
There’s just one problem, as I’ve alluded to before. There’s no decent option for financial advice for somebody just getting started. Paying $1,000 or $1,500 for fee-only advice is silly when you’ve only got $10,000 to invest. We all know mutual funds aren’t a good idea. Small-time investors are left to getting their advice from books and blogs.
Financial middlemen will always exist
Robo-advisors have seemingly filled this niche, and low-cost real estate companies will now sell your house for a fraction of the price charged by full-service agents.
In other words, both of these so-called “dying” industries have adapted.
Mutual funds will be next. The average robo-advisor charges a little less than 1% in total fees. There’s still an assload of money to be made in the fund business if the average mutual fund charges a little more than that. A fund can charge 1.1% or 1.2% and still make enough to pay the advisor and deliver a healthy profit to shareholders.
And there will always be the investor who thinks they can beat the market using actively managed funds.
The average person needs a financial middlemen. They’d be lost buying a house without a Realtor or buying an investment without an advisor helping them. These people will always make up the bulk of the population. You can either accept it and pay the price (remember, both real estate commissions and fee-only financial planners are open to negotiation), or educate yourself to do without. But be warned; option B is much tougher than you think.