Sunday, January 28, 2007

The Consequences Of Following Bad Advice

By your real estate dude

This week has been busy with phone calls from folks whom you might say, enjoyed the hot real estate market of a couple of years ago a little too much. At the time, money seemed to grow on trees, or at least on houses at any rate. Just like kids in candy stores many folks grabbed all they could eat without realizing that a belly ache was just around the bend.

Lenders were coming out of the woodwork to offer “miracle loans” with interest rates bordering on 0%. There were loans for everyone and just about any desire could be realized. Mortgage people were like magicians waving their magic laptops like wands and producing money out of thin air. People were magically purchasing houses they could never have bought before. Others were buying toys galore by pulling the equity out of their homes at interest rates that almost made it look like free money. All the while, long time real estate and loan professionals were being called “old school” and “out of step” because we urged our clients not to go for the money grab. Happily many listened, but sadly many did not. The truly sad thing is that often the lenders and agents who helped these folks get into a mess abandon them when it comes time to clean it up.

A broker friend of mine in El Centro called me about just such a tale. A woman called him to complain that she had purchased a home from another broker and was now in serious hot water. Her broker, who also acted as the lender, had sold her an $800,000 home with a “no money down, fully adjustable, negative amortization loan”. “Negative amortization” means that the monthly payment is less than the actual interest owed for that month. “Fully adjustable” means that as interest rates rise, her house payment rises as well. The net result is that, her house payment has doubled due to rising interest rates and the woman actually owes more on her home after making the payment than she did before. Her payment is not enough to cover the interest that is owed on any given month.

She was able to finance the $800,000 because the appraisal that was performed at the time of the purchase inflated the value of the property. My broker friend estimates that the home was never actually worth $800,000. It was worth closer to $750,000 at the time of purchase, but the appraiser overstated the value to get the loan funded. Due to the softening real estate market, the current value of the house is about $700,000, but the owner now owes over $800,000 because the unpaid interest is adding up.

When my friend explained this sad news to the woman she was heartbroken. She told him that her broker had advised her to make this purchase, that he had brokered the loan for her and selected the appraiser. She said she did not truly understand what kind of loan she was getting at the time. My friend had never spoken to the woman before and naturally asked who had referred her to him. There was a long pause after which she said, “The broker who sold me the house.”

Hopefully, you have been spared such a horrible experience and are not suffering from the money grab belly ache. But, just in case you are ever tempted when the market booms again, I remind you of an old children’s poem by Mary Howitt called “The Spider and the Fly.” The spider hoodwinks the fly and has her for dinner by flattering her and telling her just what she wants to hear. The moral of the poet’s story and this column are the same and I don’t think I can improve upon Mrs. Howitt’s rendering; “And now, dear little children who may this story read. To idle, silly, flattering words, I pray you, ne’er give heed. Unto an evil counselor close heart and ear and eye, and learn a lesson from this tale of the spider and the fly.”

Thursday, January 11, 2007

Getting divorced & selling a home

By Your Real Estate Dude

A few days ago, I received an email from an old client asking me for any advice I might have for a friend of his who is going through a divorce and needs to sell a house as a result. I gave him a list of the basics, and after looking through them I thought perhaps I might share some of these things with you. Hopefully, you will never need them.

It goes without saying that divorce is a very emotional process. It is quite common for couples to let things go during a divorce simply because they are overwhelmed. Sometimes they do so because they are feeling hurt and want to cause the other party harm. Either way, emotions run high. As a result, the house can be a major bone of contention. It is with this in mind that I generally make the following five suggestions to my clients who are in this situation:

1. As far as you are able, put your differences aside in order to get the home sold. Couples will sometimes use the sale of the home as a weapon against each other. This is generally in neither side’s best interest. My advice is, put aside the emotional desire to lash out and do what it takes to get the house sold and move on with your lives. That means: pitch in to make the payments or agree to split the profit or whatever it takes to save as much of the equity you’ve built up as possible. Nobody wins if the house doesn’t sell and you lose thousands of dollars in the process.

2. Hire an agent who works with divorcing couples often. If you and youre spouse cannot communicate with each other without arguing, your agent should be able to help you come to some basic agreements regarding the house. I represent divorcing couples often and have found that the agent can make or break the process. The agent should: refrain from taking sides, work to the best interest of both parties, listen patiently and be diplomatic but truthful and forthright even when it’s difficult. When the agent spends more time hiding then helping, you have the wrong agent.

3. Keep the house payments current. I cannot tell you how many couples have come to me after their house payments are three or four months behind hoping for help. In most cases, they could have made the payments but were unable to come to an agreement regarding who paid for what. If the payments are not made, the bank will probably foreclose and you risk losing your entire investment.

4. If you are in a financial bind over the house, price it aggressively in order to sell it quickly. This means you will walk away with less money in the end, but something is better than nothing.

5. Don’t confuse your Realtor with your attorney. Your attorney represents only you and is there to look after your best interest in your dispute with your spouse. By contrast, your Realtor represents all of the owners of the home equally and has a fiduciary duty to each of them. He is there to look after the best interest of both of you in the sale of your home. Therefore, he cannot and should not get involved in your dispute or take sides.

I realize that none of these suggestions are easy to accomplish and hopefully you will never find yourself in need of them. But if you do, following these guidelines might just save you from losing not only your marriage but your shirt.

Monday, January 01, 2007

Foreclosures are up. So, what’s the big deal?

By Joel Persinger
YourRealEstateDude.com

It seems that wherever I go these days someone is talking to me about something discouraging they have read or heard about the real estate market. Last week, a client of mine had a party at his home to show off all the improvements he’s made prior to putting the home on the market. While I was there, I ended up in a discussion with a friend about foreclosures and what effect the rise in foreclosures is going to have on the market in the coming years.

Based upon the rise in foreclosures and the “struggling economy”, this gentleman has become convinced that home prices are going to drop like a rock in the coming year; perhaps even to the level of prices some five years ago. Since his argument was based upon his impression that the economy is struggling mightily and that foreclosures are a major indicator of coming trends, it might be instructive to take a hard look at the economic facts.

With very few exceptions, economists tell us that the nation’s economy is doing quite well. The same can be said of the local and state economies. The forecasts offered by the Burnham-Moores Center for Real Estate at U.S.D which were released in December are prime examples. But, if you still aren’t convinced, just talk to the retailers who cleaned out my wallet over the holidays! They’re probably still counting their profits.

It is true that some sectors of the economy are not doing as well as others and that the real estate sector has experienced a slow down. However, it is quite normal for some economic sectors to out-perform others. In fact, I can’t remember a time when this was not the case. Nevertheless, unemployment is down, consumer spending appears steady and even though fewer California homes sold in 2006 than in 2005 the price of homes in California still went up! The California Association of Realtors reports that the median price of an existing single-family home in California increased 1.4 percent in the month of November alone. This increase isn’t huge, but it flies in the face of the conventional opinion that home prices are dropping like stones. Appreciation has slowed dramatically, but home prices are holding steady and even increasing ever so slightly on average.

The other piece of the argument was foreclosures. It is true that the number of foreclosures has increased and such events make great headlines. But, what no one seems willing to tell you, is that the number of foreclosures is such a miniscule percentage of the number of homes sold or owned at any given time that it makes the foreclosure number hardly worth mentioning.

According to data provided by San Diego based InnoVest Resource Management, mortgage lenders recorded 9,058 notices of default in San Diego County in 2006. This is just under twice as many as were recorded in 2005. A notice of default or N.O.D. is the document that is filed by a lender to start the foreclosure process. The filing of a N.O.D. does not automatically mean the home will be sold in foreclosure. On the contrary, there are many opportunities for the owner of the home to make good on the loan and keep the house. The statistics on InnoVest’s website show that less than 20% of the homes for which a N.O.D. was recorded in 2006 were actually sold by the lender. That means that over 80% were never actually foreclosed upon. If we then take the 20% figure as the actually foreclosure number roughly 1,812 properties were sold as a result of foreclosure in San Diego in all of 2006. That is less than 7% of the homes sold, not including duplexes, vacant land, etc. The figure would actually be lower still if the month of December were accounted for. November is the last month for which current data is available from the San Diego Association of Realtors for 2006 sales.

The foreclosure number becomes even less significant the more we work the figures. For example: if you divide the number of foreclosed upon properties by the total number of homes in San Diego County on which there is a current mortgage loan, the resulting percentage doesn’t even hit the radar screen.

So, as you’re listing your new year’s resolutions for 2007, consider a resolution to look on the bright side. There are good things just around the corner for real estate and I wouldn’t want you to miss out by listening to the naysayers.