When is "equity" really equity?

By Joel Persinger
YourRealEstateDude.com

As I walk through my neighborhood each morning I can do something that I could hardly have done twenty years ago. I can see my neighbor’s equity in their driveways. Over the last five or six years, some of my neighbors seemed to have struck it rich. Suddenly they were able to fulfill the new American dream of having more “stuff” than the guy next door. Almost over night, driveways were populated by high end luxury cars, new trucks, dune buggies, RVs or boats, all purchased with something called “equity.” But, what exactly is equity?

If you listened to all the late night infomercials or “Get Rich in Real Estate” books that came out during the recent real estate boom, you are probably convinced that equity is the money you have buried in your house just waiting to be tapped. It’s as if you had a hidden deposit of crude oil just a few feet under the grass in your front yard and every huckster in the world knew a way for you to tap that thing the easy way and live the good life. The problem is; that’s not how equity works.

In the purest sense of the word, equity is a rough estimate of the amount of money you “might” receive if you sold your home at any given moment. That estimate is a moving target at best, since property values rise and fall as the market shifts. Thus, the equity you had last year is not the same as the equity you have this year, or the equity you will have next year. It’s as if that crude oil deposit under your lawn had the oddball ability to grow or shrink at a moment’s notice without first consulting you. Consequently, taking out loans against your equity can be somewhat risky depending upon what you plan to do with the money.

Some of the folks in my neighborhood took out loans against their equity to improve their homes. In doing so, they increased the value of the property and along with it, their “equity.” One fellow I know purchased his home long ago. He owed very little on it and wanted to improve the property. He took out a loan for $100,000 and improved the landscaping, added a garage, put in a new driveway, RV parking a covered porch, new windows & doors and fixed up the inside. When he was done, his home was a much nicer place to live and the value had increased by about $150,000. Knowing that equity rises and falls like the tide, he then applied himself diligently to paying off the loan as soon as possible.

Another fellow used about the same amount of his equity to buy toys which depreciate rather quickly. If you have ever purchased a new car, RV or boat, you know that the value of such items decreases dramatically the moment you take them home. In his mind, he was living the good life. He had all the toys he ever wanted and then some. But, the market shifted and the interest rate on his $100,000 loan started to climb. Suddenly, living the good life started to become painful. So, he refinanced his house and rolled the $100,000 into the original amount he owed. Now he has one giant loan with one giant payment and I haven’t seen his toys leave his driveway very often of late. He works a lot.

As you consider the two examples I’ve given you, it’s important to remember the classic definition of “equity” which I gave you at the beginning. It is a rough estimate of the amount of money you “might” receive if you sold your home. It is not a bank account, a gold mine or a giant oil deposit under your front lawn. You can take a loan against that estimate, but it is a loan against the “possibility” of future earnings. You only really have equity when your house is sold and you have the money in your hand. Then and only then do you know for certain how much equity you really had.

“Done” is never perfect

By Joel Persinger
YourRealEstateDude.com

Being a bit of a perfectionist about many things, I have missed many an opportunity simply because I was trying to get something done perfectly rather than simply getting it done. One day, a friend of mine was watching me working furiously at a project in an effort to make it “perfect”. He noted that I was also running very close to my deadline. At the moment of most frustration for me, he nudged his way in and said, “Let me give you a hand”. The next thing I new, he had slapped the thing together, made sure it worked and announced, “There; all done”.

I made my deadline because he interceded, but I wasn’t happy about it. We talked about it shortly after I delivered the “finished” project. Actually, I should say that I talked about it. I ranted and raved about the “proper” way to do things and that “sloppy” work is best not done at all. All during my little tirade, he just sat quietly and listened until I ran out of steam. When I could think of nothing else to say and was sitting there, red faced and huffing, he leaned over and quietly said, “Done is never perfect.” Then he got up and strolled out. I have never forgotten that lesson.

Decades later, I have clients who like things to be perfect just as much as I. The problem is that when they are trying to sell a property, the home never ends up on the market because the seller is constantly working to make it “perfect” prior to selling. Perfectionist buyers never buy a property, because they never find one that is “perfect.” Even if they ever do make an offer on a property, they drive the seller and both agents crazy complaining about every little detail to the point that the seller and buyer can’t stand each other. The end result is that many such escrows never close and the buyer still doesn’t end up owning a home.

So, here’s a little dose of reality for you if you’re a perfectionist like me. The world is not perfect and never will be. No home you buy will ever be perfect. If you’re selling, just accept the fact that your house is never going to be perfect. Stop working yourself to death, put it on the market and get it sold. Otherwise, you’re going to end up owning it much longer than you planned. Do the best job you can given the resources and time available and then move on. Oh, and by the way, about that little project I told you about at the beginning. Everybody loved it!

Avoiding the sharks in real estate waters

By Joel Persinger
YourRealEstateDude.com

My grandfather used to call them, “Snake oil salesman.” My dad’s term of choice was, “Ambulance chasers.” But, the common term that I most often hear applied to such folks is, “Sharks.” They are the opportunists who prey upon those in trouble. They pop up at every disaster or financial downturn. So, it’s not surprising to see them circling the waters of the San Diego real estate market.

I have said many times that the current real estate market in San Diego is not bad; it’s just different. We found ourselves in an unusual market of double digit appreciation for a few years and those of us with short memories took that to be “normal” when it was not. The market we have currently is “normal.”

That having been said, the previous market spurred people to new heights of greed and unrealistic expectations, for which many are now paying the price. Homeowners and buyers leveraged just about every bit of equity because money was cheep and easy to get. But that is no longer the case and many “homeowners” owe more on their property than it is worth. They are upside down, frightened and desperately looking for an escape, like shipwrecked sailors clinging to the last vestiges of their sinking vessel. Can you see the sharks circling? I can.

Every day I see the little signs posted on the side of the road here and there offering to help those who are in this unenviable position. In bold letters they announce, “Save yourself from foreclosure” or question, “Owe more on your home than it’s worth?” While some of these outfits might be legitimate, I’d bet my first dollar that most of them are simply opportunists looking for a quick buck from desperate people. In my humble opinion, you’d be wise not to jump into the water with any of them lest you get bit!

So, where do you turn when you’re upside down on your home and feeling like your taking your last ride on a ship called the Titanic? After all, these little signs on the side of the road are offering you a life boat and I’ve just told you not to climb in. The simple answer is to educate yourself by seeking lots of advice and doing your homework.

The first thing to remember is that there are no magic solutions, no matter what the “sharks” may claim. You probably didn’t get yourself into a financial mess without working at it and, like it or not, you’re going to have to work to get yourself out. The second thing is to get advice. If you owe more on your home than it’s worth, you should seek advice from a qualified attorney, a CPA who has direct experience helping people in your situation and a real estate broker whom you know well and trust to be honest and to tell you the hard truth.

As you pull these professionals together to work on your behalf, it is important to remember that, while it is helpful to delegate to people with greater experience and knowledge, it is never a good idea to abdicate your responsibility of taking care of your own affairs. It has been my experience that nobody cares more about your finances than you. My advice is to roll up your sleeves and stay actively involved. When it’s “sink or swim”, the only way to keep your head above water is to keep treading and the only way to keep from being eaten is to avoid the sharks.

Rolling with the punches

By Joel Persinger
YourRealEstateDude.com

As the old saying goes, “into every life a little rain must fall.” That old proverb comes true more often than not when someone is buying or selling a home. Sometimes the issues are many. Sometimes they are few. At times they can loom so large as to seem overpowering and other times so small as to hardly warrant notice. But one way or the other, there are almost always last minute issues that pop up during an escrow. The trick is in not falling to pieces when these little devils pop up.

I recently had an escrow that was fraught with last minute issues that I must admit, I have never experienced before. I had listed a home for an older couple who wanted to move closer to their kids. They had lived in the home for many years and one of them had taken quite ill.

Once the property was listed my folks and I went right to work. We took pictures, ordered advertising and had a sign company come out to place the “For Sale” sign in the front yard. Placing a sign in the yard has never presented a problem before, but somehow the sign man struck a gas line when he dug the hole for the sign. You would think we had thrown a party for first responders. Just about everyone imaginable showed up, from the police and fire department to the gas and electric company.

Not long after we placed the property on the market, the couple went ahead and moved. After all, one of them was ill and they didn’t want to delay their goal of being closer to family. It’s a good thing they did, because shortly after the move the spouse who had taken ill died. It was quite a tragedy and had everyone thrown for a loop, including the buyer and buyer’s agent.

As I mentioned earlier, they had lived in the property for many years and had let some things go a bit. Concerned about maintenance issues, the buyer requested that the pool be professionally serviced. The seller complied and a pool company was contracted to clean and service the pool and equipment. Shortly after the filter was cleaned and new Diatomaceous Earth was installed, the pool became a cloudy, disgusting mess. The Diatomaceous Earth, a powdery substance used to help the pool filter do its job, had found its way back into the pool. During the servicing, a valve had gone bad and, once again, an issue needed to resolved that had the buyer in a panic.

Having finally completed the repairs to the pool, dealt with the gas line issue and addressed the necessary paperwork required in order to complete the escrow after the death of one of the sellers, it seemed that everything was running smoothly, and the buyer’s agent scheduled an appointment to complete their final walk through the house.

That very morning, I received a call from the termite company. Apparently, while drilling into the slab in order to treat the home for subterranean termites, the termite company technician struck a water line and flooded the laundry room. Escrow was scheduled to close the next day and the buyer was ready to move in. Unfortunately, everything was delayed because the water had to be turned off in order to make repairs. As I got into my truck to leave the property later that day, I said to myself, “If the only choices are to laugh or cry, laughing is the better of the two.”

Believe it or not, I have told you this story for a reason. Just about every escrow has issues that pop up. The vast majority of the time, everything works out in the end. As the buyer or seller, you have the choice of making yourself miserable by freaking out at every opportunity, or understanding from the outset that things will go wrong and simply roll with the punches when they do.