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Getting Out of a Real Estate Transaction

Published by Lawrence Roberts | December 26th 2008 | Views:

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Changing your mind on a stock purchase is relatively easy. Stocks are very liquid, and transaction costs are very low. However, changing your mind about a real estate transaction is not so easy. Real estate is very illiquid in a declining market, and the transaction costs are very high.

If you quickly change your mind about real estate, you will lose money. Of course, it is common to price it just above your purchase price and hope someone just a little more foolish than yourself comes along to bail you out. In a declining market, the greater fool is harder to find.

In the world of large real estate transactions, buyers do an enormous amount of due diligence to completely understand what they are buying and the state of the market they are buying it in. It is not uncommon for buyers to spend hundreds of thousands of dollars on property research and still walk away from the transaction. This is prudent because wealthy real estate investors know how illiquid these investments are, and they know how costly it is to change their minds later.

Small-time residential real estate speculators know none of this. For many, the extent of their due diligence is walking the property with a salesman. Some will get the necessary inspections to accurately determine the status of the property, but many will not. Most amateur speculators simply don't care: real estate always goes up you know.

The comedy of errors must be very troublesome to the speculators who lose tens or hundreds of thousands of dollars of their own money. Many of the knife catchers who have been speculating since 2007 have invested large downpayments, mostly because the banks wisely forced them to. The bagholders for the next leg down in the markets will be the knife catchers, and the money lost will be their own.
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