Current Problems with RE

Real Estate (RE) is facing a global crisis with a number of issues that can be summarized under 3 major concerns:

The lack of accessibility

The dream of owning a home is increasingly out of reach. » This is how journalist Alan Crawford introduces his article on Bloomberg. Not only are the prices to buy properties soaring, but rents are also soaring. The issue has become a global one with some cities more at risk than others. Some people have started to remind governments that housing is a human right. Investment properties are even more inaccessible as the high entry ticket has an impact on down-payment that is typically 25%-30% of the purchase price. This means a buyer would need between $200k – $300k to purchase an investment property of “just” a million.

The lack of transparency

This is a longstanding problem that the RE industry has faced since the beginning of real estate management. Managing properties brings its own set of challenges as well, including:

• Lack of transparency between property management and property owners: Property owners hire the managers to act in their best interest, but their economic interests can diverge in various respects. For example, the management company may make decisions that keep operating expenses lower to the detriment of the management of the property and its long-term value. There are limited means to achieve full transparency that ensures each party is acting in the fully economically optimal way.

• Opposing goals between owners and tenants: Similarly, the interests of the owners and tenants can diverge in that the tenants will lack incentives to care for the property in terms of necessary repairs and proper precautions to avoid disasters. In certain circumstances tenants may not even view the strengthening of the value of the property and of its community as in their best interests, as it could lead to higher rents or of being priced out of the area entirely. As of the time of writing, this ‘housing crisis’ of which residents are suffering from, rather than benefiting from, growth in the economic value of their properties and communities is one of the largest and most heated debates within the US political and economic discourse.

• Lack of sense of community to increase the value of properties: Americans increasingly lack a sense of community within their respective neighborhoods. A recent study found that one in four Americans under the age of forty don’t know a single neighbor by name. This, along with the lack of direct economic incentives to care about the well-being of one’s neighborhood (and as mentioned, sometimes the concern that a neighborhood’s flourishing may result in higher rents or being priced out), presents a lose-lose in what should be a win-win situation. This tragedy of the commons situation results in people acting in ways that are sub-optimal to their community and homes due to failure to internalize the effects of their actions or inactions. Certain types of technologies bear some of the blame for this by allowing people to instantly connect with others and to access information around the world and hence de-emphasizing their immediate surroundings, but we believe that other types of technologies can now be deployed to fix it.

Illiquidity

Selling or refinancing a property requires capital and time. It involves many third parties, including dealing with buyers and lenders. Selling an investment property is even more complex with the need to provide rent rolls and other reports that show how a property is operating. Unlike the stock market, real estate has been mainly illiquid, meaning property owners are unable to get their money out easily. Selling or refinancing are the only options and both these processes can take months and are extremely complex. Throughout the history of real estate, the main problem has ALWAYS been liquidity.