Real estate: to buy or not to buy?



The current trend
How does a decision for the property come about?
Customer type 1
The role of the real estate consultant
Customer type 2
When is a real estate purchase worthwhile?
Prerequisites for a real estate purchase
Criteria for choosing a property
Characteristics of the market today
Reasons for the real estate property

Having observed the real estate market in the past three, four years attentively one cannot miss a certain trend: the time of hype level prices is over, as well as the “saving-taxes-for-every-price” mentality and the time of the “everything’s possible”-financings. Real estate buyers have become more critical – rightly, and financing institutions have become more selective in handing out long-term credits.

At the same time a price clean-up has occurred on the market. Excessively expensive new building projects are as little successful today as one can make excessive prices for old buildings attractive to buyers.

Critical customers, having learned the hard way from the experience of others and from attentive observation of the market and their own researches, precisely inspect any offers and have learned to calculate and to compare. This often leads to an excessive fear of taking a decision at all – with the aggravating consequence to then have nothing done for saving taxes by the end of the year because even though they made the comparison they didn’t make any decision.

Between these channels of the careful inspection of offers and prices on one hand and the long-term obligation to a property on the other hand – to hand on and stand still year after year like an undecided ship’s captain only results in dissatisfaction. For on one hand colleagues and friends have gotten back thousands – ten thousands of DM from the finance office, but on the other hand one is more or less dissatisfied with oneself because one actually wants to do something – otherwise one wouldn’t have dealt with the problem in the first place.

Today we dare saying that a decision toward the real estate property is, first of all, a psychological process. For rationally, numerous arguments would speak in favour of taking such a step; arguments which we will go into detail shortly. But let us first have a look at the psychological problem again. And we best do so by asking the question: which customer is buying real estate properties at all today? And: what aids does he avail himself of when doing so?

Mainly two trends can be observed today: on one hand the customer who approaches this subject for the first time and more or less ingenuously. He relies on his consultant when doing so; usually this is not an agent but an investment- or rather a real estate consultant who gives a recommendation based on his market expertise. Yet when he gives the same consultation to all types of customers, no matter the difference in income, taxes, number of children, own funds and goals in terms of investments, then he doesn’t deserve the designation consultant but is an agent to a single product vendor. So we simply ignore this type of consultant and only call those an independent consultant who is looking at the market in the name of the customer in order to find a suitable offer for him.

If his search was successful then he presents the customer a result. He will usually be able to offer a property which seems profitable to the customer. Then, but only after further consulting, sometimes after several inspections of the property, the customer decides to buy – provided he has the means of financing secured.

The consultant will also become effective at this point by finding a financing for the customer which is suitable to his investment purposes and his capital assets. If he consults another independent company promoter this doesn’t militate against him: for his specialty is the real estate, not financing it, which is a subject in itself and has its own specialists. He also consults different property developers, initiators or people offering a property and sometimes also uses his private connections, namely if he can get an attractive property from someone private and at an inexpensive price and can refer this to his customer. In this case he lives up to his function as an agent, which he is authorized to do based on § 34c of the German brokers’ and developers’ ordinance.

The real estate consultant is also active when carrying out the deal, meaning when doing the sales contract, and when inspecting all bills the customer will get that will result from the purchase, and when supervising the tenancy rearrangement etc (provided he is doing his job expertly and on behalf of the customer). And yes, the consultancy of the customer can even go up to the point that the customer may contact the consultant if anything should ever go wrong with the tenancy or when a tenancy change occurs.

If this type of customer has taken the step of going to the notary the first time and thus dared purchasing an apartment, if he has become acquainted with the process and has seen that it is much less painful than perhaps he thought it would be in the beginning, then he might even take the decision to purchase a second property. Only providing that income and tax burden as well as given liquidity reserves allow this step and providing that the total encumbrance can still be born in case of a vacancy.

If the customer has become acquainted with the subject of real estates over the years and has possibly even resold one property then he begins to become expert on the subject – and here we can see the second trend which is currently visible on the market – and he is able to look for a bargain on the market on his own. No matter if it is from private, by an agent or by finding cheap opportunities on compulsory auctions – the customer has come to enjoy the property as an investment tool and will take the adventure again and again.

The real estate consultant is also acting on behalf of this second type of customer. He can sell properties from the customer; he can give him inexpensive opportunities or use his contacts to provide him with a larger financing quickly and inexpensively.

In other words, the image of a real estate consultant is far beyond the classical metier of the agent who is doing nothing but relaying between vendor and potential buyer on the market. The job of the consultant is to really service – and even to advise against a purchase sometimes if this is necessary and justified. And this occurs more often than one beliefs, by the way. Especially when couples have different opinions then one shouldn’t override the opinion of the respective partner. For otherwise something will go wrong inevitably, which will only strengthen the original viewpoint of the fearful spouse – as if he would have evoked the disaster.

But let us get back to the question we originally asked; if and how much buying a property is worthwhile today and what customers could be interested in this at all. The market has cleaned up per what we stated. But this also means that good properties are clearly differentiated from unprofitable and insecure investments. Thus when consulting both the right location of the property and the type of the property, as well as the maximum affordable sales price and the own funds that need to be invested (which can also be zero) all plays a vital role. The fact that the investment purposes of the customer need to be brought to the fore again and again doesn’t make things easier for a consultant: to the contrary this means complex work to keep referring the customer to his own goals and wishes and to inspect offers based on these criteria, to evaluate them and to choose them.

With that one thing becomes clear:

No one makes the step of going to the notary overnight when doing a property investment purchase (this can be different in case of a private purchase for owner use!). Such a decision process is often taking months, even years in some cases. For sometimes the prerequisites need to be achieved at first, without which a property purchase wouldn’t even be possible:

  1. a stable income of a certain amount
  2. reduction of existing personal credits
  3. own funds/ savings
  4. a long-term wish to invest

Since the times of over-expensive house builder exemplars is over too, as well as the times of those totally exorbitant special depreciation properties, today there actually only is a small spectrum left: properties which meet the demands of the critical investor intent on security and profitability.

The state has had its share in this. High tax advantages on real estates have been cancelled. In exchange the limits that are being set are nearly going into the extreme; for instance the subject of the listed buildings which is not getting supported by the tax office anymore, which it used to be for many years. And after all we have gotten well refurbished and kept up inner cities thanks to this. And not least also the special depreciation has lead to a marathon of refurbishments in the cities of the new federal states, which has saved a lot from the total decay and which can now still be admired as historical and unique building substance by the future generations.

Unfortunately the market neither rewards the historical significance of urban architecture nor the intricate quality of refurbishment. For after all only the question “what rent do I get for my property” determines the profitability of every single investment in real estate. Without rent there is no income for the investment – and thus not only no interest yield but also often a quickly escalating amount of debts of unaffordable interest and amortization rates, if no adequate rental income can be attained on a long term.

Thus today the question of how well can the property be rented out needs to be brought to the fore more than ever in every case of buying a property. Roughly, it hardly plays a role where the property is located – whether it is a large or a small city, on the countryside or in the metropolis: the ability to rent out is secured everywhere where jobs exist or are being created and where trade, industry and economy are pulsating. The fact that cities like Frankfurt am Main, Hannover, Duesseldorf, Munich, Hamburg or Berlin are at the top of the ranking list in this regard is nothing new – but the past years have shown that whole regions can turn into wasteland due to increasing unemployment, and that plenty of apartments become vacant where massive losses of jobs have occurred. Then it hits almost anyone: whether a new building property with luxurious equipment or a hardly refurbished old building, it barely makes a different. Only the good locations in the inner city are usually excepted by this, due to the tendency of the residents to rather live in the centre than in the border areas, especially if one wants to be conveniently situated.

Why all these deliberations on the subject of real estate? It could be interesting to you as a property owner, -customer or -vendor to know the market today with all its facets. If one factors out the professional real estate investors (large institutions, insurances, very rich people) then the market is characterized by the following today:

  1. there is a large offer of properties on the market, from private and commercial vendors
  2. the buyer today is much more critical than a couple of years ago
  3. the real estate prices are moderate (except in some exclusive top locations where they are unbowed high)
  4. the rents are mostly stable, in some places even declining, but always increasing in exposed locations
  5. the financing terms are as cheap as never before
  6. the selection criteria (terms of creditworthiness and quality of the property) of the financing institutions are less strict and tight
  7. really good properties are rather seldom despite a large offer
  8. the governmental aids have been cut down tremendously and further reduction is to be expected
  9. the trend to private provision and safeguarding by asset values increases
  10. the long-term achievable yield plays a bigger role than ever when choosing to do a purchase

What can we conclude from all this:

  1. Take advantage from the situation of the market if you are interested in purchasing. Take inexpensive opportunities available and secure a long-term financing with a low interest rate (around 5% applicable to ten years)
  2. Make your choice based on criteria of the ability to lease the property, the long-term yield and security of the asset value based on a good location
  3. Do not wait until the year is over but look for consulting, settle your investment goals and – decide!

And there are more good reasons speaking for the real estate property than ever before:

  1. properties are the most stable form of investment
  2. properties are proof to inflation
  3. properties are the ideal “second pension plan”
  4. real estate (building land) is becoming less and less and more expensive

And last but not least:

  1. real estate properties are the only pension plan which can be built up by means of outside finances and value increase and which can mostly be financed by others (tenants, state)

Real estate: buy or not buy – this question can be answered more than ever today in favour of a purchase.


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Important note: Any evaluations, advices and indications on our information and internet pages are mostly subjective evaluations and solely have the purpose of giving real estate investors a general orientation. They make no claim to be complete, right or constantly valid. Most real estate information is founded on conditions or legal regulations (taxes, regulations about apartment ownership, tenant’s rights and more) which might have been current or of interest for real estate buyers at the time the text was written. These conditions and legal foundations – especially also fiscal aspects – possibly have changed by now. Thus we recommend, before one does any property purchase, to get the current data on the real estate markets, tax- and other legal regulations and innovations, as far as these could be of importance to the objective and subjective success of the investment.