Valor Economico has recently written about how an “accounting bubble” has allowed the Brazilian homebuilders to show profits in a struggling market. The main question is: are all these companies really solvent?

Here is an excerpt of the article:

“It’s still unknown whether there’s a bubble in Brazil’s real-estate industry, but one thing is certain: There was an accounting bubble, it has burst and the contents are not looking good.

Rossi, which released its second-quarter earnings (net profit of R$51.3 million on R$795.3 million in revenues) on Thursday with a 49-day delay, is only the most recent bad news coming from the industry, which massively flocked to the market when another bubble was in full swing, the capital markets one, in 2007 (Real-estate development is today the second-largest industry in number of companies on BM&FBovespa.)

Investors’ minds are probably swirling with questions, but they shouldn’t expect any answers.

Let’s study Rossi’s case. A phenomenal delay in delivering figures and they still come with the auditor “abstaining.” It’s not one qualification, or two or three, something that would already be very serious for any company, especially one on Novo Mercado, BM&FBovespa’s market supposedly populated by companies with stricter governance standards. One qualification, despite indicating something has run afoul of regulations, is still only an opinion.

An auditor usually abstains from issuing an opinion when there’s not enough information on which to base the opinion. It means that after almost 50 days, Deloitte still didn’t know what to do with Rossi’s figures.

One can list the usual excuses related to changes in accounting standards, the industry’s idiosyncrasies and other byzantine discussions. Is it justifiable? No.

Rossi’s CFO said in a conference call with analysts that auditors had already finalized “98% to 99% of work,” adding that the company kept a “proactive” and transparent stance by reporting data as soon as it’s available and with “parties comfortable” in assuring the figures divulged. (Comfortable parties? Let’s just skip that part.)

In a more poetic way, the company declared in a message from its management included in the earnings report that this time there was “a yearning [an urgent longing, according to Merriam-Webster] for a more conservative vision that is more aligned with the real-estate industry’s environment.”

The company didn’t say what the previous vision would be. Would it be liberal? Daring? It only added that it decided to accept the recommendations of the new auditor and change some “accounting practices” (R$715.3 million’s worth of adjustments). Does that statement say something about the work of the company’s previous auditor, Ernst & Young Terco, or does it simply suggest that times, opinions and customs change? What if current auditors had already concluded 99% of work, why not wait for a couple more days and arrive with a “clean” balance sheet, if that’s even possible?

We don’t know. And it’s no use seeking answers in the stock market, the CVM [Brazil's securities and exchange commission], in the Committee of Accounting Practices, in the Institute of Independent Auditors, in the Housing Union, in the Foundation to Protect and Defend Consumers. That’s why we’ll be happy enough in knowing that the bubble has burst. The accounting party of Brazil’s real-estate industry has reached an end.”

Source: Valor Economico

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9 Responses to “Cooking Books”: Brazilian homebuilders have been using creative accounting to hide massive losses

  1. SALAZAR says:

    EVERYBODY COOKS BOOKS IN BRAZIL. IT IS AMAZING HOW PUBLIC COMPANIES CAN BE PROFITABLE SINCE PRIVATE COMPANIES FIRE THE ACCOUNTANTS IF THEY SHOW A TAXABLE PROFIT.

  2. Rodrigo Rodrigues says:

    *** Wake Up !!***

    The game is over, the bubble is about to burst !! Wake up ladies&Gents !!( Corretores) disagree, because they get nothing if there is no sale. Realtors get paid only if their clients buy, no matter how bad the deal is, which is the exact opposite of the buyer’s best interest. Agents take billion of reais each year in commissions from buyers. Agents claim the seller pay their commission, but fail to mention that the seller gets that money from the buyer. Think about it: who brings the money to the table – the seller or the buyer? All money comes from buyers. No buyer, no money.
    Real estate in Brazil is all about preventing the buyer from getting information. There is no free market because bids on houses are never published and you have no way of knowing whether bids are faked to get you to think you have to pay more. There should be a law to make all bids public and validated by a bank, but the Corretores( Realtors) won’t let it happen

    Never trust a word from the realtor. They are constantly lying that “I heard there’s another offer, make your highest offer” or “The bank has a verbal with someone, but if you come in with a strong offer they might take it.” They don’t seem to understand that I want a deal, there’s no reason to get in a bidding war over any particular property in this market, and if one owner isn’t willing to consider a low bid, there’s a house right down the street for sale too. As soon as I told one agent I didn’t want to make an offer if there was a second bidder, that bidder mysteriously disappeared and he claimed he mis-heard the information and there wasn’t anyone else.
    If a house is a really good deal, agents have a big financial motive to buy it first and flip it to you. 
    Realtors ALWAYS GET FIRST DIBS AT EVERY HOUSE even before it is listed. Realtors always have a shot at the best deals. In fact, IF A LISTED HOUSE WAS NOT ALREADY PURCHASED BY A REALTOR OR one of their buddies—that means IT IS A BAD DEAL. If it were a “good” deal—they would have bought it. Under the Corretores/monopoly system— prospective buyers only get to look at the junk left over that Salespeople and their “friends” do NOT want.

    Why should you give up nearly two years of your life working to pay an agent who is not even really helping you? That 6% commission means 6% of the 30 years of work it takes to pay off a house. That’s 1.8 years donating your labor to a real estate agent! Just find a house on your own, hopefully a house for sale by owner, and get a real estate lawyer by the hour to draw up the offer and complete the sale.

    There are agents who really believe they are helping the buyer, but they’re in denial about their conflict of interest. There’s a great quote explaining this “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

    Mortgage brokers ( Financeiras and Banks as well)disagree, because they take a percentage of the loan. They want buyers to take out the biggest loan possible to maximize their commission. Even worse – mortgage brokers get paid according to how bad the deal is for the buyer.
    Government agencies like minha casa minha divida disagree, because their own survival  depends on guaranteeing private loans with public money. These agencies are perhaps the largest scam ever devised. Most people will borrow as much as they possibly can to buy a house. The existence of Minha casa minha divida just make it possible to borrow yet more money by pushing lending risk onto taxpayers, benefiting bankers with larger interest payments, and harming buyers with higher housing prices. Ironically, Minha casa minha divida  drive up the price of housing in the name of “affordability”. The public is unlikely to ever understand this. The perfect crime.
    Banks disagree, at least when they can get origination fees and then sell the mortgage, because in that case they do not care about the bankruptcy of borrowers. 

    Appraisers disagree, because they are paid by mortgage brokers and banks, so they are going to give the appraisals that mortgage brokers and banks want to see, not the truth. Appraisers that kill a deal by telling the truth do not get called back to do other appraisals.
    Newspapers disagree, because they earn money from advertising placed by real estate agents, lenders, and mortgage brokers. Papers are pressured by that money to publish the real estate industry’s unrealistic forecasts. Worse, agents have a near-monopoly on actual ask and bid information, and newspaper reporters never ask agents hard questions like “how do we know you’re not lying about those prices?” The result is an endless stream of stories reporting that the real estate agents say it’s a good time to buy. Asking real estate agents about housing is like walking into a used car dealership and asking the salesman if today would be a good day to buy a car.
    The Brazilian  Government disagrees, because everyone in Congress gets bribes (oops — I meant campaign donations) from the Builders, banks etc  So every Federal law will be aimed squarely at increasing commissions for the Corretores  and increasing interest payments to banks. Buyers lose, because they have no lobbyists in Brasilia The very laws of your  country have been corrupted to squeeze more profits out of you.
    Current owners disagree, because they do not want to believe they are going to lose huge amounts of money. Anyone who owns is likely to encourage you to buy too, to prop up their own house value via comps, and so that they can feel that they are not alone in their sinking boat.
    Houses always increase in value in the long run. 
    FALSE. Price is what you pay and value is what you get. The value of a house is constant. It just sits there. You get shelter, but you have to pay property tax and maintenance and the loss of alternative uses of capital. A house is a dead asset. The price of a house rises with salary inflation, but house prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
    For example, prices in the Netherlands are about the same as they were 350 years ago, in terms of how many years of work it takes to buy a house. Warren Buffett and Charles Schwab have both pointed out that houses don’t increase in intrinsic value. Unless there’s a bubble or a crash, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite – the house drained cash from its owners for 100 years of maintenance, taxes, and insurance – costs that never go away. The price of the house went up about as much as salaries went up.

    I don’t see any salary inflation in our future for years to come, and that’s the only kind of inflation that boosts house prices. Inflation in everything else (food, energy, medical) just takes away from the money people have to spend on housing. 
     
    As a renter, you have no opportunity to build equity.
    FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance. Renters are getting paid to wait, both by the monthly savings and by watching the value of their savings increase relative to housing.
    Owers are losing every month by paying much more in interest than they would pay in rent. The income deduction does not come close to making owing competitive with renting.
    Owers are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of “owners” who actually own only 20% of their house. Remember that the agents will take 6% if they possibly can.
    Owers must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.
    Owers must insure a house, but not most other investments.
    Owers must pay to repair a house, but not a stock or a bond.
    Renting is just throwing money away.
    FALSE, renting is now much cheaper per month than owning the same thing. If you don’t rent, you either:
    Have a mortgage, in which case you are throwing away money on interest, tax, insurance, and maintenance.
    Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income could be 50% to 200% beyond rent costs forever, and for many is enough to retire right now.
    Either way, owners lose much more money every month than renters. 

    If someone tells you that you are throwing money away, you can reply “The landlord is giving me a huge gift. He’s subsidizing me to live in his rental. I’ll take free money any day.”

    There are great tax advantages to owning.
    PARTIALLY TRUE. It’s true for high-income couples with expensive houses and big mortgages, but not for modest-income couples in modest houses, especially if there is no mortgage.
    Every married couple filing jointly automatically gets to subtract an $11,400 deduction ($5,700 for singles) from their adjusted gross income to arrive at their taxable income. Alternately, you may add up modest deductions in seven categories: Medical, Taxes, Interest, Charity, Casualty and Theft, Job Expenses, and Other Misc. If the total of your expenses in these categories exceeds the standard deduction, you can itemize them on Schedule A of your tax return to reduce your taxable income.

    Let’s assume that your only deductible expenses fall into the Taxes and Interest categories. Taxes mainly include the income tax you pay to the state (or its sales tax) and the property taxes on your home or other non-investment real estate. In a high-tax state like New Jersey, you might easily pay $7,200 in property taxes and $200 in income taxes, for a total of $7,400. So the first $4,000 of interest expenses just brings your deductions up to the standard $11,400, without reducing your taxable income.

    For a high-income couple, let’s assume they can itemize their state income tax of $3,400, contributions of $1,000, and medical expenses of $1,000. These deductions use up $5,400 of the $11,400 standard deduction. So the first $6,000 of property taxes and interest save them nothing. After that, their savings depend on their tax bracket, which could be as high as 35 percent.

    For couples with modest incomes and mortgages, the first $11,400 of taxes and interest save them nothing.

    Evaluate your situation before making a buy-rent decision based on potential income-tax savings. Be sure to consider the deduction limit imposed by the AMT, too. Interest is paid in real dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn’t pay income tax on those dollars before spending them on mortgage interest. You don’t get rich spending a dollar to save 30 cents!

    Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that’s just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.

    If you don’t own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

    Even if you pay outright, you’re still renting the house to yourself, losing alternative uses of that money, and taking the risk of falling house prices.

    Compare the cost of owning to renting.

    All real estate is local, so you cannot say anything about the national market.
    FALSE. Lending is global. All loans are harder to get. This will push prices down everywhere.
    OK, owning is a loss in monthly cash flow, but appreciation will make up for it.
    FALSE. Appreciation is negative. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments.
    As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
    FALSE. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing.
    No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

    House prices don’t fall to zero like stock prices, so it’s safer to invest in real estate. 
    FALSE. It’s true that house prices do not fall to zero (except in Detroit), but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 4% completely wipes out everyone who has only 10% equity in their house because agents will take 6% if they can trap the seller with a contract. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
    The bubble prices were driven by supply and demand.
    FALSE. Prices were driven by low interest rates and risky loans. 
    A for-sale sign in a yard instantly increases the supply of houses on the market. There is no need to wait for builders.

    The truth is that prices can rise or fall without any change in supply or demand. The bubble was a mania of cheap and easy credit. Now the mania is over.

    They aren’t making any more land.
    TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren’t making any more buyers, either.
    Japan has a severe land shortage, but that hasn’t stopped prices from falling for 15 years straight. Prices in Japan are now at the same level they were 23 years ago. If we really had a housing shortage, there would not be so many vacant houses.

    Your calculator says the house I’m interested in is worth far less than the asking price. That’s not very helpful in coming up with an offer. FALSE. It’s very helpful to be able to document that you could be paying much less to live in the same location and same quality house, just by renting. It’s a great negotating point.
    It is hard to find a rental that is the equivalent of this home. PARTIALLY TRUE. Sometimes there just is no equivalent rental available in the same area. Placing an ad saying you’re looking for a rental in that area in a certain rent range is often enough to bring new rentals out of the woodwork though.
    Attractive areas will not follow strict economic laws of their worth. If I keep bidding what a home is strictly worth, I will always lose to someone who simply wants to live there, even if their money could be better invested elsewhere. FALSE. You can’t lose by winning. Renting the same quality house in the same area for much less money every month than an owner pays is winning. Maybe others get the intangible feeling of ownership, but you get the cash that they are losing.
    If you don’t own, you’ll live in a dump in a bad neighborhood.
    FALSE. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.
    Some people want the mobility that renting affords. Renters can usually get out of a lease and move anywhere they want within one month, with no real estate commission. On the other side, if you can get a long-term lease, you will probably find it worthwhile to repair the place to your taste. The average time of owning a house is only seven years anyway.

    It is cheaper to rent a house in a good school district than to buy a house in the same place. In fact, children benefit in several significant ways from living in a rental. Aside from having a choice of school district, kids in a rental benefit from better parks in nicer neighborhoods, more living space, and less stress in their parents’ voice — all because it is still so much cheaper to rent than to own in bubble areas.

    A fun trick to rent a good house cheap: go to an open house, take the agent aside, and ask if the owner is interested in renting the place out. Often, desperate sellers will be happy to get a little rental cash coming in and give you a great deal. Sometimes they will rent to you for free ($0) as long as you keep the place up and pay the utilities.

    The biggest upside is hardly ever mentioned: renters can choose a short commute by living very close to work or to the train line. An extra two hours every day of free time not wasted commuting is the best bonus you can ever get.

    Owners can change their houses to suit their tastes. 
    FALSE. Even single family detached housing is often restricted by CC&Rs and House Owner’s Associations (HOAs). Imagine having to get the approval of some picky neighbor on the “Architectural Review Board” every time you want to change the color of your trim. Yet that’s how most houses are sold these days.

    The house down the street sold for 25% over asking, and that proves the market is still hot. 
    FALSE. agents have been known to create the false impression of a hot market by deliberately “underpricing” a house, especially in California. I personally have seen this happen repeatedly. Say a seller’s agent knows that house will probably go for $400,000. He places ads asking $300,000 instead, a price lower than the buyer would accept. (Bait-and-switch is illegal when selling toasters, but apparently not when selling houses.) The goal is to first of all prevent buyers from knowing what a realistic price is, and secondly to get buyers to blindly bid against each other. There are four players in this game and three of them are against the buyer — the seller, the seller’s agent and the buyer’s agent. Yes, the buyer’s own agent works against the buyer, because there is no commission if there is no sale. There’s a saying in Las Vegas: “There’s a patsy in every game, and if you don’t know who the patsy is, you’re it.”
    If you want to prove your agent is not on your side, ask to see houses “for sale by owner” or houses listed by discount brokers. If the agent cannot make a commission, you will not be told about the house.

    There is a way around the conflict of interest inherent in being a buyer’s agent: let the seller’s agent be your agent too, just for that one house he’s trying to sell. Then the seller’s agent has a big motive to lower the price, because he will get double the commission if you buy it rather than some buyer with his own agent.

    Note that you are free to bid far lower than the asking price. You might be pleasantly surprised to find out how desperate the sellers are. Another good reason to start low: you can easily raise your offer, but it’s awkward to lower it. have all your friends bid extremely low for the house before you, then your own low bid will seem more reasonable.

    Another suggestion for dealing with underpricing:

    Get over it, and just beat them at their own game: Beat out all other bidders by bidding unrealistically high, and just be sure to have your offer contingent upon financing & house inspection. Since the bank won’t finance you above the appraised value, you’re then in a very strong position to re-negotiate the price far lower during escrow. The other bidders will be long gone.
    I was lucky that my agent told me to increase my bid by $50,000. Otherwise I would have lost, because my agent knew about a secret bid $40,000 above mine. 
    FALSE. Your agent gets paid nothing if you don’t buy the house, and he gets more if you waste more money by bidding too high. It is unwise to take at face value “secret” information that costs you money.

    I’ll just amortize the commissions and other transaction costs over 30 years and they’ll be OK.
    FALSE. The average length of ownership is seven years, not thirty. That means the 7% or so that you’ll pay in commission and closing fees comes out to about 1% per year, and that’s actually a lot of money. You may think you’re different and will actually stay put for 30 years, but statistically you’re not, and you won’t.
    Rich Chinese (or Europeans, or Arabs) are driving up housing prices.
    FALSE. The percentage of US houses bought by rich foreigners is tiny. Furthermore, American housing is clearly a bad investment at this point. Foreigners can just wait and watch American housing continue to fall, and then buy for much less in a few years. Rich foreign investors are not dumb enough to buy into a badly overpriced market, but your agent is hoping that you are.
    Local incomes justify the high prices.
    FALSE. Most bankers use a multiple of 3 as the maximum “safe” price-to-income ratio. We are well beyond the danger zone, into the twilight zone. The price to income ratio is still around 10 in the SF Bay Area.
    Prices were always way beyond equivalent rent in San Francisco (or whatever expensive town)
    FALSE. Price to rent ratios were normal in San Francisco and other the other expensive towns in 2000. That ratio more than doubled by 2005. See page 34 of John Talbott’s excellent book called “Sell Now!”
    Higher-income people can afford to spend a larger portion of their income on a mortgage, so your 6% rule of thumb does not apply to them.
    FALSE. Even if you can spend more than 6% of the purchase price each year on a mortgage and other costs to own a house, that does not mean you should. In fact, gross rents are almost always less than 6% in richer neighborhoods, making it an even worse deal for the buyer in these places. The renter living in the same quality house next door loses far less money per month.
    You have to live somewhere.
    TRUE, but that doesn’t mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his downpayment.
    Newspaper articles prove prices are not falling in my neighborhood.
    FALSE. The numbers in the papers are not complete and have murky origins. Those prices are “estimated” from the county transfer tax and making that tax public record is optional. A buyer who does not want you to see how little he paid has only to ask to put the transfer tax on the back of the deed and it will not show up on computer searches of the deed, which show only the front. Others voluntarily pay more tax than they have to, in order to inflate the apparent price to fool the next buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo county, you have to pay only $100 extra tax to make your purchase price look $100,000 higher.
    Even though you can in theory go to your county building and get sale price information, in reality the county will give it to you in a painfully slow and inconvenient way. For example, in Redwood City’s county building there are PC’s where you can look at data for any particular house, but you cannot print, you cannot save to a floppy disk, you cannot email data out. All you can do is write things down manually, one at a time. And that’s how real estate interests like it. Your elected representatives are serving them, not you.

    Supposedly impartial sources like Dataquick are paid for entirely by people with a large financial interest in “proving” that prices are not falling. This makes it unwise to take their numbers at face value.

    For the obviously biased sources like real estate agents, you should assume that their sales price numbers do not include the effective price reductions from “incentives” like upgrades, vacations, cars, assumed mortgages and backroom cash rebates to buyers.

    My appraisal proves what my house is worth.
    FALSE. “An appraisal in its typical residential real estate form is little more than a comparative analysis conducted by someone with no skin in the game offering confirmation that other lemmings are paying too much for their houses as well.” -from an article on morningstar.com
    Amazingly, government house price measures do not include houses with jumbo mortgages. This excludes well over half of all houses in California. So the government can report a slight price rise, but fail to mention that prices actually fell for the other 60% of houses in California.

    Foreclosures destroy neighborhoods, so we should stop foreclosures.
    FALSE. Empty houses destroy neighborhoods. Houses remain empty only because the prices are too high. “Anti-foreclosure” programs just keep prices too high, and keep houses empty. In areas where there are jobs, if prices were allowed to fall enough so that salaries can easily cover the cost of owning, people would move in and take care of the houses. In areas without jobs, the first priority should be jobs.
    It’s not a house, it’s a home.
    FALSE. It’s a house. Wherever one lives is home, be it apartment, condo, or house. Calling a house a “home” is a manipulation of your emotions for profit. Don’t let them push your buttons.
    A house is a wooden box that sits out in the rain and slowly rots. No one would buy in this market if they really thought about how much pain it’s going to cause them in the long run. That’s why they sell you a home, not a house.

    If you don’t own, you’re a failure.
    FALSE. Maximizing your savings and escaping the slavery of debt is success. Most people have a hard time understanding this, but they do understand cash. You could show them your bank statements to prove you’re way ahead of the game as a renter, but then they would probably just ask you for a loan!
    The use of the status card is another well-known button that agents push to trick people into making foolish purchases. Don’t let them do it.

    Property in the San Francisco Bay Area is a luxury good, and so will be less affected by economic downturns.
    FALSE. Most San Francisco Bay Area mortgages are ARMs, and ARM loans are not taken out by the rich. People on the border of bankruptcy take out ARMs because they can’t afford fixed rate loans. The rich don’t have loans at all.
    Many of these ARM loans have exceptionally deadly repayment terms, and so are known as “neutron mortgages”. Like the neutron bomb, they destroy people, but leave buildings standing. They are also known as “suicide loans”.

    House ownership is at a record high, proving things are affordable.
    FALSE. The percentage of their house that most Americans actually own is at a record low, not a high. We do have a record number of people who have title to a house because they have dangerous levels of mortgage debt, but that is no cause to celebrate.
    Rents could shoot up, making it a better deal to buy.
    FALSE. Rents are limited by the money people actually earn, not by how much they can borrow. Try walking into a bank and asking for a loan to pay your rent. For rents to shoot up, salaries would have to shoot up first. Salaries are not likely to rise at all given the current unemployment rate.
    You failed to factor in emotion. More houses are sold on emotion than will ever be sold based on perceived value. They buy all they can afford plus.
    FALSE. Buyer emotion doesn’t matter at all to the lenders, not on the way up or on the way down. Most people will borrow as much as the possibly can. The limiting factor is lending, not emotion.
    It’s unpatriotic to talk about mispriced houses. It might drive down prices. 
    FALSE. Lower prices are better for America, especially for new families. Aren’t lower food and energy prices better for America? Housing prices are the same: lower is better. Most Americans directly benefit by a decrease in house prices. Only the banks benefit from increased mortgage debt.
    If you own a house, lower prices have very little effect. If you want to sell and buy another house, higher prices mean you’ll just have to pay more for the next house, while lower prices mean you will get a discount when you buy. If you want to buy a bigger house, you come out ahead with lower prices.

    My wife will divorce me if I don’t buy a house.
    FALSE. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won’t divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month each spring, which you can do just by avoiding that suicidal mortgage.

    My new baby needs a house.
    FALSE. If you’re pregnant and desperately want to buy a house for your new child, that’s a perfectly normal feeling called “nesting”. It is also the leading avoidable cause of financial fatalities! You most definitely do not need a house for a baby. A baby is utterly unaware of whether it lives in a rental or not. Babies also don’t need much space.
    Your baby will do better if you’re not stressed out about a mortgage. You have five years before school quality becomes an issue, and at that point you can more easily move into the best school district as a renter than as an owner. Avoid debt and save your money so your child has a better start in life.

    I just want to own my own house.
    TRUE, most people do. There’s nothing wrong with that. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great – unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. “People want to buy a house, they want to have someone tell them it is the smartest decision they are making in their lives, and they don’t want to hear about any downside risk.”
    Housing is the biggest expense in nearly everyone’s life, far more expensive than food, gas, energy, even more expensive than education or medicine. To reduce the time you spend working to pay for housing is to increase the time you have for everything else.

    Cheap housing is good for us all! High housing costs take away from families’ ability to save for retirement, fund their children’s education, travel and lead a quality life.

    What should you do?
    First of all, both sides should avoid using agents, especially corretores who are corrupting our laws in Brasilia with lobbyists. Agents suck money out of the deal and monopolize the critical information of exactly how many bids there are and at what prices. Your own agent or the seller’s agent may be bribed by another buyer to prevent your better offer from being presented to the seller, for example. Just find a property or buyer on your own, have the property inspected, and get a real estate lawyer to draw up or review the offer. If you make an offer, mail the offer to the seller yourself so that your agent or the seller’s agent can’t block it. If you are accepting or rejecting an offer, mail that information to the bidder yourself so that your agent or the bidder’s agent can’t block it. Agents have been known to block offers that don’t give their own agency both sides of the commission.

    Never sign any contract with any agent! Agents try to trap you with a contract so that you cannot know for sure what is going on or make independent decisions. If you don’t want to sell a house yourself or negotate a purchase, hire a lawyer or someone else by the hour to do the work for you. You’re likely to save many thousands of dollars by avoiding commission fees.

    Do not let any agent know your maximum price, or how much you are pre-approved for. Pre-approval is used by the agent to see how much more they can extract from you.

    To find out the lowest price an owner might accept, you could “happen” to wander by when the owner is outside and say: “I’d can’t come near that price so I’m not interested, but just curious, what’s your lowest price?”

    If you own an expensive house, sell now so you can actually keep some of that funny money that appeared out of thin air. Otherwise, it will be painful to watch it vaporize back into thin air. Investors in mortgage-backed bonds subsidized the increase in the price of your house. Now they want their money back, and your challenge is to prevent them from getting it. The only way is to sell before your neighbors do. Time is not on your side.

    If you can’t sell without a loss, it’s probably best to just walk away and free yourself from mortgage slavery. It depends on whether your loan was “recourse” or “non-recourse”. In the latter case, the deal is simply that you can stop paying the loan and give back the house at any time. It’s perfectly legal and moral according to the terms of the mortgage. Now that the government has temporarily stopped taxing forgiven debt, you can do it without owing anything! But talk to a lawyer and accountant first. If you refinanced, you may have given up your non-recourse status.

    A long-term rental with a multiple-year lease is a good way to get stability with the economic benefits of renting. Many landlords are desperate, and you’ll probably find them quite willing to negotiate a long term lease. Make sure they can’t raise the rent much during the lease term, and make sure there is only a small penalty for ending the lease early. Even if you sign a normal 1-year lease, most landlords are happy to keep good tenants as long as possible.

    If you want to buy, look around and see that house prices are falling. Why hurry to buy into a falling market? Time is on your side. Save your cash and buy for much less in the future. All your savings on the price of a house are tax-free.

    Signing a 30-year commitment is absurd. Can you guarantee your income will be uninterrupted for 30 years? It worked in the previous generation, when Dad worked at the same factory for 40 years and retired. Those days are gone. 80% of all mortgages are never kept to maturity. Triple the price of the property when you add interest for 30 years in. It’s only worth it if the property doubles in value every ten years. Those days are gone.
    Do not buy anything that wasn’t built properly, no matter how cheap it gets. Many foreclosures are houses that weren’t built properly, and these houses tend to be foreclosed over and over again. Lots of houses are ugly, but an ugly but well built house is often the best deal.

    The way to win the game is to have cash on hand when others cannot get a loan. You do not want to be bidding your hard-earned savings against people who are bankrupting themselves with debt. It will be time to buy when lenders once again demand a 20% downpayment from everyone and get serious about checking ability to repay. You’ll know prices are reasonable when it’s cheaper to own than to rent the same thing. We’re not there yet, not even close. Find a nice cheap rental, invest your savings every month, and enjoy the show till then.

    “Beware the boss who encourages you to buy a house or new car. Mortgages and car payments enslave you to the paycheck that your boss controls.”
     ”The outright ownership of real estate has long been considered as a sound long-term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real estate values are also subject to large fluctuations; serious errors can be made in location, price paid, etc.; there are pitfalls in salesmens’ wiles.”

    Subsidies simply increase prices by increasing demand. Subsidies benefit the first few recipients, but the sellers quickly catch on to the new source of revenue and increase prices to negate that benefit for all subsequent recipients. Ultimately, all subsidies flow directly to businesses as excess profit at public expense. This is true especially for housing and health care subsidies, and the businesses that benefit from these subsidies spend lavishly on lobbying and campaign contributions to make sure the subsidies continue, in the name of the “public good” even though subsidies are obviously a public harm. The true solution to shortages is to increase supply of houses, doctors, or whatever. But increased supply harms profits, so business interests squash all public talk of increasing supply.

    Interest never sleeps nor sickens nor dies it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. – 

      

  3. SALAZAR says:

    RODRIGO WOULD DO EVEN BETTER SLEEPING ON THE BACK SEAT OF HIS CAR AND KEEPING HIS STUFF IN THE TRUNK. AHHH… DO NOT DRIVE AROUND AND KEEP THE CAR IN A SAFE
    FREE PARKING.

  4. brazilian horse says:

    @ rodrigo

    thanks so very much for this analysis. a friend is wanting to buy in Rio, and this info is so helpful.

  5. brazilian horse says:

    @salazar

    great suggestion, but exactly where in rio is this safe free parking?
    another option: safe free camping and free showers and public transport (a taxi for special occasion)

  6. Carlos Cooper says:

    Dear Rodrigo Rodrigues,
    Thank you so much for your information!
    You are providing a great service to everyone interested
    in investing in Brazil!

    Carlos Cooper

  7. John B. says:

    Rodrigo, you presented such an amazing comment-article, which makes me doubt about the sanity of the Brazilian government. Paying such a huge amount of money to a RE agent should be banned. They shouldn´t get more than 2 % of the price. Why do they allow this? But it is obvious that bad business is also a business.

    Real estate agents should work to help you not to scam you. Is there any regulation or controlling organ? Or is it working as well as the electoral justice in Brazil? Well I think that the situation you have described is similar to Condo Situation in Toronto. On the other hand, in Toronto you at least have some chance to find a good agent who really helps you to make a good deal for you.

  8. Rodrigo Rodrigues says:

    There are no camping grounds in Rio , like in the States or Canada.
    The principles I ve mentioned work all over the World not only In Rio, Think economics not emotionomics.

  9. Rodrigo Rodrigues says:

    The Realtors work for the banks and not for you, if they really wanted to look at your interests they would not make any money , specially where prices are inflated, telling you the truth hurts their bottom line not yours, The Brazilian goverment wants this ” Mortgage Machine ” running for
    political reasons , The bubbles We had in the States, Europe and right now in Brazil were not by accident , these bankers and their associates hold degrees in financing, statistics ,mathematics, etc
    Most of them are Phd’s, so basically We have a crisis by design , lack of regulations, It is disconcerting to see how far the Goldman Sachs’ “Club” has infiltrated into the American (and World) financial institutions. I have never been more frightened on how the American Government has been run and now I am even more frightened! Something has to be done, and done soon.

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