The other half don't understand it at all.
So who paid off the state legislators? In every state I know of you can get every math, business math and real estate math question wrong on the state licensing exam and still pass and get your license.
That really doesn't matter unless you believe the Realtor® line "your home is your biggest investment." Well shoot, if you really believe that why do you walk around the office citing your inability to do basic real estate math and still get a real estate license as some how heroic, a badge of honor.
You wouldn't invest your retirement plan with someone who couldn't explain the difference between a Roth IRA and a defined benefit 401k plan would you? Forget about it, you wouldn't even buy a pair of shoes without asking the clerk about the quality of the workmanship, materials and durability. Why should you expect someone to list or buy with you as their agent when you lack the basic fundamental knowledge to calculate and explain the estimated cost or proceeds of the sale?
In addition to selling homes most states require a real estate license to sell vacant land, commercial real estate, manage rental properties and businesses. How can you perform half these functions without a basic understanding of real estate math?
Let me ask you . . . You just showed a house that costs $200,000. The buyers have $50,000 to put down, the taxes are $3000 per year, insurance is about $1200 per year what is the approximate monthly payment?
What would the house rent for (here is a clue, you need local market knowledge beyond the information above to make this work)?
How much do I save by buying a home like this instead of renting?
What is the price point for that home for a 6% return on cash if it was rented?
What is the market rent and what price would I have to pay to break even if prices do not change?
What would my short term negative cash flow be on a financial break even?
If you can't figure out the answers to these questions, do you have any business listing or selling the house in question?
If you said yes you are a con man and you need to get out of the business.
Instead of learning the math Realtors® learn a bunch of stupid lazy meaningless catch phrases than they can't explain - but they use them like loaded guns - they are loaded phrases that say and mean nothing, but if you challenge them - or asking for more detail makes you run the risk of a long boring explanation so is it worth the effort of asking. The net effect is that by using these phrases Realtors® can cover for their financial and economic ignorance, hide their mathematical literacy and intimidate the questioner from asking any more questions on the subject. This is the opposite of full disclosure - it is a shameful and abusive way to treat the public in order to save face.
Here are a few examples of meaningless banter that most Realtors® use to avoid directly answering questions that require basic math, financial and economic knowledge to answer:
When Realtors® say
They really mean
It is the law of supply and demand . . .
Durned if I know please sign the contract and stop asking stupid questions.
Your home is your biggest investment . . .
Don't ask me I stink at math, please sign the contract
Our market has seen amazing appreciation over the last year.
I have no clue about what the market is doing, but I sure made a lot of money - please sign the contract.
This home is a great investment if you want to live here or hold it as a rental.
I am clueless about investment criterion, if you can't find a renter to pay twice the going rate you can always live there in a neighborhood you don't want - please sign the contract.
This is a great time to buy . . . or There has never been a better time to buy . . .
I can always use a few extra bucks - please sign the contract.
Real estate is local . . .
Forget what everyone else is saying please sign the contract.
The News is biased and negative so you need to not pay any attention to what they are saying . . .
If you investigated these things for yourself, you would see how little I really know, please sign the contract.
I am the area expert . . .
Don't challenge my opinions - just sign the contract
The list goes on and so does the problem. Wouldn't it be better to learn your job and become a real professional rather than offering the old razzle-dazzle?
The fact is if you can't deal with numbers how can you do a CMA? How do you manage your business? How do you work with investors? How do you work with rental properties? How do you make sure that the HUD is correct before a closing? Oh that's right, you just say "Pay no attention to the media, real estate is local, I am a local expert so take my word for it.
Sadly, with the advent with the internet and information savvy customer, that old dog won't hunt anymore. If the customers know more than you, why do they need you in the first place?
Bottom Line: Perhaps instead of using mushy gut feelings and glossing over issues that matter to customers Realtors® should learn economics and maybe some math.
This is the first in a series on real estate and business math. If you want to learn more about numbers and economics, look for my next post.
© 2008 Dan Homan