How might the world have been different if, starting 10 years ago, every would-be home buyer had access to a free and independent tool that showed them - in highly personalized and granular detail - precisely what they could and could not have afforded to buy? Would there have been a real estate crash at all?
"I don't really think people are always trying to extend themselves," says Michael Carvin, cofounder of a new online company, SmartAsset.com, that seeks to serve this purpose. "It's a matter of education."
Carvin's New York-based brainchild, which launched last month, has already attracted 14,000 users. The startup goes far beyond the mortgage calculators on most bank websites. By entering personal financial data, people can use it to determine if it makes more sense to rent versus to buy - a question banks don't typically address - and answers other questions. It makes projections of a person's "net wealth" after differing years of home ownership or renting. It charts the progress of that number in a side-by-side comparison of both scenarios.
Undergirding the projections is tax information for every city, county and state in the nation. By overriding the engine's calculations to change any factor, from income to down payment amount to credit score, users can watch the projections adjust accordingly.
"Financial planners have great tools to help them allocate (their clients') assets across equity, debt and international stocks," says Carvin, who worked in private equity for the London-based hedge fund Altima Partners before becoming an entrepreneur. But, he added, "I don't think there's ever been a sophisticated way for financial planners to [help clients] make the softer decisions."
Ultimately, the site plans to expand to help people make two dozen important financial decisions, ranging from buying a car versus leasing one; to going back to college or not; to saving for a child's college education; and picking the right time to retire.
The idea for the company grew out of Carvin's frustration in buying a home in New York State in 2010.
For work, he often built sophisticated models analyzing whether or not his firm should buy a company. He decided to take a similar approach to his own home purchase by building a detailed Excel spreadsheet to understand how a home purchase would impact his net wealth.
Despite intensive preparation, he was still caught off guard by many steps in the process.
"The problem with big decisions like this is you don't know what you don't know," Carvin says. "A week before I went to close, the lawyer called me and told me I had to pay this big 2% transaction tax that I had no idea existed. I was just amazed. I had done a lot of homework. But the transaction taxes were different county to county."
Specific taxes like one, for example, now are included in SmartAsset's calculation of home purchases in every region of the country. On a page titled "How Much Should I Put Down?" taxes like this one are broken out for users to see.
Even for a sophisticated buyer like Carvin, having that information would have been helpful - especially because, he says, realtors and loan officers were constantly telling him he could afford homes that cost double the amount he believed he could afford.
"I think we all benefit when people make better financial decisions," Carvin says. "I don't want to say that the financial crisis could have been avoided (with more tools like SmartAsset), but certainly, had we all been making decisions that we could have afforded, it wouldn't have been as bad. If we can help people make better financial decisions across a lot of events, not just home ownership, I think that could have a really positive societal benefit."
Ann Marsh writes for Financial Planning.
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