Moody’s $3,995 report predicts housing bottom this fall

(2/13/09) In a report released earlier this month, Moody’s “Economy.com” predicts a nationwide home price bottom in metropolitan areas in the 4th quarter of 2009.

While we think that may be possible, we think there are a number of red flags Moody’s may be neglecting. We’ll explain our own theory of when to buy or sell after we discuss Moody’s new report

Giving some evidence that there’s no recession among economists, you can buy the report for only $3,995 from economy.com, or you can read Moody’s summary and key findings below for free:

A little perspective

Woke up this morning to one of those stories that makes you thankful for what you have. Even if it is going down in value.

Worth a read:

“Pride in A Paycheck”

There’s more to life than money. Way more.

Market Predictions 101: Our Two Real Estate Market Cycles

Note: Most of our market predictions are based on So Cal’s two market cycles: the annual cycle and the broader economic cycle. It’s basic stuff, but if you understand both cycles, you’ll be miles ahead of 90% of the population and 50% of the agents in trying to figure out what’s going to happen next.

Yesterday Peter Viles had an interesting post on who’s buying in So Cal today in his L.A.Times’ blog. That got me thinking about writing a post on “Time to Buy?”

But I’m going to save that post for the near future. Instead, I’m going to “set the stage” for that with the first post in our new “back to basics” Real Estate 101 series.

1: The “Economic Cycle”

In any real estate market, there are at least two basic cycles. We’ll call the longer cycle the “real estate economic cycle” It roughly corresponds with the boom-bust-boom-bust business cycle we’re all too familiar with. 20 years ago I used to say these cycles generally take about 4 – 7 years. In other words, it usually takes 4 – 7 years to go from bottom through peak back to new bottom.

Well, the current So Cal real estate “economic cycle” last hit bottom around 1995, so it’s already gone about 13 years. But we were heading for a bottom before the Fed began their “life support” intervention after 9/11 in 2001 (see “How We Got into this Mess”). That would have been about an 8 – 9 year cycle, at least.

2: The Annual Cycle

We’re not going to insult your intelligence by telling you how long the annual cycle lasts, but we will say it’s much more predictable then the longer “economic cycle.”

All things being equal, the annual cycle has both prices and activity bottoming in December, then gathering steam through the winter, peaking in late spring, leveling off in summer, and heading down in fall.

In what we used to consider a “normal” market, prices only went down in the fall about half as much as they went up in the spring. As we near the peak of a booming economic cycle, prices go up year round, but they go up faster in the spring and slower in the fall. Outside events, like the Fed lowering rates on 9/12/01 or Bush I invading Iraq in 1989 impact both cycles.

By “activity” we’re talking about homes going into escrow, which is what the average Californian means when she says “Our house just sold!” (Not that the average Californian is saying that much right now. But she would if she’d read our post on “How to Sell Your So Cal Home for Top Dollar in 30 Days in Any Market.”)

DataSlow’s median pricing statistics report homes closing escrow, which is usually about 30 – 60 days after they opened escrow. And DataSlow reports those stats about a month after the median closing date, so it’s 2 – 3 month old “news” when you read it in the paper. So DataSlow’s charts would indicate that prices peak in the summer, but that’s just the homes that went into escrow in the spring closing in the summer.

Why . . .

do prices usually peak in the spring and drop in the fall here in So Cal? 3 reasons:

1. Income taxes. Many buyers are brought into the market each year when they have their taxes done and realize they need more tax shelter, and that begins early in the year as those with simple returns file in January. For other’s, buying a home becomes a new year’s resolution.

2. Honey Do Lists. Many sellers also make a new year’s resolution to sell and move up or down. But all it takes for a buyer to “get on the market” (start looking) is to stop at an open house or get online (see “A Better Way to Search for Home Listings“). And first time buyers usually one to get into that home of their own by summer.

But it takes a lot of work for most sellers to get on the market! Work they’ve been putting off for years. And if it ain’t happened in the last decade, it ain’t gonna happen real fast now. For most sellers it takes 4 – 7 months to realize they’re not going to get everything done and call a Realtor for advice on what to do & who to hire. So must sellers are getting on board the real estate train right when most buyers have already gotten off. That affects supply and demand, which affects price.

3. School, Vacation, Weather & Holidays.

O K, that’s really 3 – 7, but we’ll lump them together. Buyers with school age kids want to get into their new home before school starts in the fall, and they want to have it in escrow before school gets out in June. That’s so they can get their kids signed up at the new school before the staff takes off.

Once summer hits, buyers have other things on their plate the rest of the year. Summer vacation, back to school, then Thanksgiving and Christmas. (Despite the weather, Christmas in California begins in September or October. As my pastor, Chuck Smith of Calvary Chapel Costa Mesa, says, “When you see those Christmas decorations going up in the stores, you know Halloween is just around the corner.”)

So buyers are pretty much too busy to buy from when the kids get out of school on. Sellers, however, tend to be at least one generation older than their buyers. They’re less apt to have school age kids, they take their vacations off peak, & they’re often just getting their home ready to put on the market when summer hits, as we said.

Selling a home is frequently a less discretionary decision than buying. Divorce, death, foreclosure, and job transfers occur at a fairly consistent pace all year round. (Actually, death tends to occur in the winter after Christmas, but you really didn’t log onto this blog to hear about my college days working at the Westwood Village Mortuary as a resident manager.)

Local Variations

The annual cycle varies by region somewhat. In areas with brutal winters (which to us is pretty much any place north of Fresno), things continue to drop until the snow starts melting. In resort areas, prices tend to peak during peak seasonl–winter in the desert & in ski areas, summer in most other vacation meccas.

How to Figure Out What’s Next

These two cycles are not synchronized, but they do influence each other. When the economic cycle is in a major downward move, prices may just level off in the spring, or even drop some. But if the downward cycle continues, they’ll drop even faster in the fall.

Our understanding of the annual cycle enabled us to predict the increase in activity that DataQuick and the Association of Realtors reported for February closings. It’s why we think closings will also be reported as up when March figures are released in about a week.

The question is, will the impact of the overall downward cycle overpower the normal seasonal uptick. Remember, it’s still early in the annual cycle: March closings mostly went into escrow in January and early February. Our best guess is that sales will be up but prices down for March closings, but by April or May prices may also be modestly up.

Part of the problem with prices is that DataQuick uses median prices, which can be skewed by differences in which price ranges of home are selling (see Jeff Collin’s summary of a detailed study that proves what we’ve been saying about this for years.)

Well, now you’ve got one of the basics of predictions down. Give it a shot, & see if you can impress your friends. Or shoot us a comment or question, so we can explain it better or add whatever we may be missing.

Top 5 Ways Not to Pick A Listing Agent

Over 30 years of selling property has shown us that selecting the right agent may be the single most important step to a successful sale or purchase.

Unfortunately, experience also has shown us that most sellers pick their agents for the wrong reasons, and they pay a huge price for that mistake.

Yesterday, we listed 5 of the most common mistakes sellers make in choosing an agent. Today we’ll identify the top 5, starting with one we’ve seen a lot of in the last two years, picking their agent based on:

5. Past performance as a buyers’ agent, in an easier market, or in another area. These might be good reasons to consider an agent, but they don’t prove anything about selling your property in today’s market. We could give dozens of examples from our experiences, but we’ll settle for just one, from baseball:

Just because Tim Salmon played great outfield for the Angels three years ago doesn’t mean he can play shortstop for them today. Let alone Center for the Lakers. Get the picture?

4. “She works my neighborhood.” This is called “farming,” and we do it ourselves. It’s a good way to get to know a neighborhood over time. But the number of notepads left on your porch or postcards mailed to your home proves neither competence nor integrity.

Until the agent’s been “farming” your neighborhood for at least four years, it proves nothing. In this market, you’d need to go back 17 years to get to the last major downturn!

Even with 17 years experience, you’d still want to investigate track record, and speak with sellers who’ve worked with him or her. The fliers or postcards may only tell half the story.

“Neighborhood specialists,” or “listing farmers” are like preachers, car salesmen, or Realtors as a whole. Some are ethical, competent, and diligent, but many others are not.

3. Lots of sales. This could be good or bad, but it raises a red flag. Most high volume agents operate with what they euphemistically call a “team,” which can also be good or bad.

We have a team–Dave, Blair, a transaction coordinator who is shared with several other agents, and a number of affiliates from escrow officer to termite inspector who are the best we can find. But other teams consist of several licensed and unlicensed assistants who pretty much do all the work for the named agent. You often never see the “superstar #1 agent” again after you’ve signed the listing.

At one seminar I recently heard the superstar speaker describe running into some poor seller of his in an airport. The superstar had “sold” his home a few months earlier, and he was actually bragging to us that this was the first time he’d ever actually met his “client.”

One more true story. A few years ago, the buyer for one of our listings was represented by one of those superstar top producers. When it came time for the walk-through I showed up to keep an eye on things. When the buyers came to the door (alone), I introduced myself as the listing agent. The buyer literally hugged me! “Oh my God! A real, licensed agent–not just an assistant!” she exclaimed. “We haven’t spoken with one since we signed the purchase contract seven weeks ago.”

Turns out, everything had been handled by unlicensed “assistants,” which were pretty much part-time kids. We’ve seen the same thing with sellers. They were “working” with top producing agents, but they rarely saw them, and weren’t happy campers.

2. Great listing packet or presentation. This doesn’t prove anything, either. Just because a politician’s a great campaigner with good commercials doesn’t mean he or she will make a good president or governor. It probably just means they bought a good listing presentation software package. In fact, most agents know they can easily get any listing if they dress nice, are friendly, have a persuasive presentation and, most important if he or she . . .

1. Tells you what you want to hear. Works every time, and most agents know it. There are even terms for it in the business. When an agent tells you what you want to hear about price, it’s called “buying the listing.” Happens all the time–then the listing sits for months while the agent tries to get a price reduction. Worked in ’04’s up market, but not today!

Sellers have words for it, too. “Great rapport!” “We felt so good about her!” “We just really clicked!” “She was so bubbly!”

It’s kind of like interviewing three doctors about your medical condition, then going with the one who tells you every thing’s fine. Tempting, but not real smart. Better to go with the best doctor, regardless of whether you like with his diagnosis or not.

Telling you what you want to hear (instead of the truth) is amazingly effective. It appeals to the sellers’ pride as well as to their wishful thinking. Kind of like flattering them while promising to make their dreams come true. Not that different from how most politicians operate, and you know how good they are at keeping their promises.

If two people agree on everything, one of them is not necessary. If an agent agrees with you too much, they’re either lying or incompetent, or you don’t need an agent at all. It’s probably one of the first two.

You need an agent who knows and tells you the truth. I remember telling an older seller who was “interviewing” us that they really needed to remove the velvet flocked red wallpaper they loved. I knew they didn’t want to hear it, but it was the truth. A few days later I got the call. “Dave, we decided to go with Suzy Q. We just had such great rapport, and she really loved our decorating.” Guess I’m glad somebody did.

If you want to feel good, go find a friend. But if you want to sell your house for top dollar in any market, especially today, go find an honest, experienced, diligent agent who will tell you the truth.

In another day two, we’ll give you some tips on how to do that. In the meantime you can always post a question or give us a call. 562.822.7653.

Top 10 Ways Not to Pick A Listing Agent, Part I

Poor Mr. Williams. We just drove by his house & noticed the sign was down. Hadn’t sold. If he’d read this post 6 months ago, it could have saved him at least $50,000 and half a year of his life.

Unfortunately, Mr. Williams has lots of company. We’d say at least 90% of the today’s sellers today are making at least one of ten major mistakes in picking their agent.

These are mistakes people naturally tend to make–and virtually all agents are able to easily take advantage of those tendencies if they choose to. Because they’ve listed a whole lot more homes than you have!

Here’s our list of the most common wrong reasons to pick a listing agent. Read it and weep. We do.

10. Amazing gimmicks. Mr. Williams picked his agent because of his “This House Talks” sign. Uses an 800 number to capture leads & texts them right to the agent’s phone. Very impressive to demonstrate to a potential seller.

But a gimmick is just a tool, & it doesn’t sell the home any more than the latest lazer level makes an incompetent carpenter into an expert. Selling today takes expert pricing, staging, negotiating, and marketing, plus integrity, diligence, & experience. Not one or two flashy gimmicks. Just ask Mr. Williams.

9. Mr. Williams also liked the agent’s warm friendliness. Can’t say we blame him–we like the guy too. But he’s only been in the business a few years, has never seen a market like this before, and it shows:

Of the 27 listings Mr. Williams’ friendly agent has taken over the past 12 months, only 4 have actually sold. 16 have expired or been canceled without selling–4 expireds for every sold! We had zero actual expireds in the last 12 months, but quite a few closed sales. Gimmicks and friendliness alone just don’t cut it.

8. Never list with someone from work. Inherently bad decision. Today you need a full time agent who’s good enough to make his living from real estate sales alone. If you know her from work, she’s not full time, no matter what she claims. Blair and I were both part time once–the first two years of our career, when we were also quite inexperienced. We know a whole lot more now than we knew then! Never, ever, ever list with a coworker, unless you work in a real estate office!

7. Friend or family, especially one who “really needs” the listing (duh!).

I recently met a fellow whose Lakewood home had been on the market for five months without an offer.

“How’d you pick your agent? ” I asked.

“Friend of my wife.”

“Any idea how many homes she’s sold in this tract?”

“Not as many as you.”

Actually, that agent had never even listed a home in that tract before. In fact, I just checked the SoCalMLS data base, & she’s never listed or sold a home in the entire city of Lakewood. And she’s only sold a grand total of one listing in the past 12 months, anywhere! That home in Lakewood’s still on the market, but now it’s in foreclosure.

Blood lines, friendship, club or church membership, or having a kid on the same soccer team as yours has absolutely nothing to do with being a good agent. Before you even mention your situation with a friend or relative, do some research. (We’ll give some tips in a few days.) Otherwise, you may become “obligated” to list with an agent that isn’t right for you. It’s a great way to ruin a friendship or family relationship. And lose money.

6. Because of the office or franchise. You can’t tell a book or an agent by their jacket! Our 30 years of selling hundreds of homes has taught us that their are bad agents in virtually every office. And good ones in some. You’re never even going to see the broker, let alone any franchise employee.

Franchises are primarily created to help the broker recruit agents and secondarily to pool funds for generic TV and other old-media ads.

The office we work at is affiliated with one of the most successful franchises in California, but I don’t think we’ve ever once mentioned which franchise it is. You really have to search to even find it on our commercial website. That’s because it just isn’t that important. We’re the ones our clients see & must rely on.

Those are five of the top ten mistakes we’ve seen sellers make, but this post is getting too long.

For the top five wrong reasons to list, including one that most agents know will get them the listing almost every time, just click here.

How to Sell Your So Cal Home for Top Dollar in 30 Days

Selling for top dollar fast isn’t all that hard, even in today’s slow market. Last month we took three listings, and had all three in escrow within 14 days of hitting the market.

In fact, our 30 years of experience has taught us that if you don’t sell in 30 days, you almost certainly won’t get top dollar. You’ll also be more frustrated with the whole process.
It’s not rocket science, either. The technology’s changed, but the basic steps to selling fast for top dollar remain the same. We’ve been teaching classes on them for almost two decades. There are only six key steps, yet very few agents or sellers complete even four of them correctly:

1. Preview & plan with a trusted adviser, often a Realtor with at least 15 years experience–one who’s been through a few slumps before. Actually, the most important step seems to be picking the right agent, and then picking his or her brains as early in the process as possible. We recommend starting by checking out our “Top 5 Ways not to Pick a Listing Agent.”

Develop priorities for steps 2 & 3 below, discuss what would be the best time to get the home on the market, and get a rough idea of the price & net you can expect.

2. Prepare the property. By now you should have determined which repairs and upgrades deserve your attention, and the time you have to get them done. Most sellers focus on the wrong things–things that bug them, as residents, but that most buyers don’t even notice.

Concentrate on things that a person would notice when just spending 60 seconds touring the home, because the first 60 seconds are the critical first impression period. That means the front yard, the front room, the kitchen, baths, & master bedroom. Don’t even think about fixing broken things that aren’t obvious, like an inoperable dishwasher. Those will be negotiated after the home inspection, and the buyer may not even care.

3. Stage the home. This is putting your best foot forward–like shining your shoes before a job interview. It usually involves removing clutter and some furniture throughout the home. Sometimes we recommend adding or changing furniture so that the home will appeal to the most likely buyer. For example, many sellers have converted a bedroom into an office or den after their kids have moved out, but frequently buyers need an extra bedroom more than a den. We actually have an inventory of what we call “instant beds” to use in such a situation. The slower the market, the more critical this step is.

We also instruct our sellers how to stage the home before each showing, which usually includes turning on extra lights and moving to the front yard while the home is shown. We usually discuss the questions they can expect from buyers and agents, and the best ways to respond (rule #1 is “Never lie.”)

4. Price accurately. Not too high, not too low. Based not just on recent sales but also on an evaluation of your competition–the best priced, most attractive homes currently on the market. Not based on what the seller values, but on the values of the most likely buyers, who are usually quite a bit younger than the seller. Here’s another place where an inexperienced, dishonest or lazy agent can cost you tens of thousands of dollars. Also one who isn’t familiar with your neighborhood.

5. Wise, aggressive marketing. This involves doing dozens of things right: flyers, Multiple Listing Information & photos, web photos and virtual tours, property search placement, web and print advertising, open houses, etc. There’s a right way and many wrong ways to do each one.

For example, the only phone numbers on our signs and flyers are our cell phones. Sign calls don’t go to an 18 year old receptionist who’s never seen the property, but to one of the two listing agents, day or night. We’re even careful about the time of day and day of the week we input our listings. Our goal is to obtain competing offers the first weekend or two. By the way, we’re counting the 30 days to sell from the day it hits the market to the day you accept an offer.

5. Negotiate wisely. Again, dozens of things that need to be done right. Herb Cohen’s You Can Negotiate Anything is one of my favorite layman’s books on negotiations, but the real secret is to find an agent who’s an expert at it. It’s not just about price–terms, time frames, repairs, deposits, release of deposits, and the buyers’ ability to qualify & intention to close are also critical.

6. Disclose wisely, follow up regularly, and don’t blow it during the escrow. My mentor used to say 90% of our work is done once the escrow’s opened. With today’s crazy news and lending climate, that’s even more true today than it was in 1980.

As always, your questions, comments, and feedback is appreciated. You can also call us directly at 562.822.SOLD. And yes, you still can sell your home for top dollar in 30 days, with the right help.

Picking Up, but for How Long?

Reporting from the front lines of the real estate battles here in Los Angeles and Orange Counties, we can now definitely say that sales activity and even prices are bouncing back from the record lows of November – January.
We think this provides local sellers with a window of opportunity, but it’s a window that will most likely be closing in a matter of months. . . or weeks.

Want evidence? We discussed our own increase in sales activity in our 2/29 Market Update post–3 listings sold in an average of about 8 days each. Then Blair noticed that our office “board” of new escrows was full for the first time in about a year, another major increase in activity. Then last night I ran into Ken, our termite expert from Coastline Termite, at the Anaheim Ducks game, and he reported a dramatic increase in sale inspections.

Trouble is, we experienced a similar bump last winter, but it petered out as interest rates went up in the spring. Then it fell apart as the subprime mortgage mess exploded, making it difficult to impossible to get a mortgage. Long term mortgage rates are rising again, as our elected officials try to borrow their way out of a recession, especially with an election breathing down their necks. And the “other shoe” of the subprime mess is dropping as I keyboard, with foreclosures only increasing their record pace.

Then there’s the annual cycle–busy spring, slow fall, prices dropping by winter. Put it all together, and it’s our opinion that sellers need to “make hay while the sun shines.” And it could stop shining sooner than you’d like. If you’d like more info, leave a comment or give us a call at 562.822.SOLD.

What about buyers? Prices, and even interest rates, could well be lower this coming December. In fact, the whole thing might fall apart in 2009, once the election’s behind us. But we wouldn’t be too surprised if prices continue to slowly move upwards, at least in the coastal plains of L.A. and Orange Counties. So, if you find a home that you really like, and you can afford with a 10 – 30 year fixed loan, and it’s in a good location, go ahead & buy it now. If not, keep saving up a down, paying down credit card debt, & looking around. If you want a direct portal to the Southern California Multiple Listing Service, just click on the “Home Search” link at the top of our regular website.

Finally, a word about timing. We’re talking about current activity–homes going into escrow. What the media usually reports is closed sales, which take place roughly 45 days after a home goes into escrow, then get reported in DataQuick’s confusing median price summaries about two weeks after the end of the month in which they close, which is about 60 – 90 days after they went into escrow. So the increases we’ve seen over the last few weeks won’t be reported until long after they close in April and late March.

Just mark your calendar–around 4/15 DataQuick (or “DataSlow,” as we prefer) will report a remarkable increase in sales for L.A. and Orange County homes, which will continue into the April closings they report mid May. You read it here first.

So, that’s today’s word from the front lines. We’d appreciate your thoughts & comments. Personally, we hope the Anaheim Ducks repeat last year’s spring performance, but the So Cal real estate market takes a more steady, less bumpy road this year. If not. . . there’s always baseball! Anybody up for a Freeway World Series?

Overcorrecting?

Sunday’s New York Times had an interesting article on“How a Bubble Stayed Under the Radar,” dealing with economic theory and herd mentality.

Basically, it said what any long term observer of either the real estate or stock markets must have already concluded: Market prices get too high near the end of most up cycles, and too low at the end of most down cycles.

I figured that out at least three cycles ago, when another Realtor mentioned the insane bidding up of home values in 1989 was typical of the last, overpricing gasps of a market about to collapse. I thought our market had peaked in 2004, which was obviously too early. Still, in 2005 I made my ill-fated effort to beat the market by exchanging for out of state property (see my recent post on out of state investing). It’s the same herd mentality that created bubbles from internet stocks to silver.

Ironically, as our southern California prices drop, people tend to forget the flip side of the same herd mentality: The lows become irrational as well. Which either will at some point create or is currently creating opportunites to “buy low.”

I don’t think anybody can know with certainty if that time of opportunity is now or yet future. Once we know for certain, it will have past, and the best bargains will be gone.

But I do know that thousands of homes are on the market for prices 20% to 40% below the highs of a few years back. And I do know that many sellers are willing to take far less than they’re asking. And interest rates are also quite low.

I also know that prices tend to go up in the first half of the year and down in the second. So it appears that this year’s great opportunity may be passing. December of 2009 may present even greater opportunities. Or not.

But at some point, this market will overcorrect. Maybe it already has.

Market Update: A Busy February

We’ve got foreclosures, federal “remedies,” a weakening economy, low interest rates, high gas prices, and low home prices, all in a presidential election year.  So it’s impossible to know what’s ahead, but we can make educated guesses.

For several months, we’ve said spring will bring increased home sales.  We also think prices will either slow or stop their decline, at least for the next few months.   Beyond that, things get cloudier, but the odds are that sales will slow again later this year.

Our own experience this February is bearing this out.  We took three listings in the last couple of weeks, and now have all three of them in escrow.  In addition, today we are opening escrow on a new home purchase for one of those sellers; the other two do not plan to purchase at this time.

We’d like to think some of this success is the result of our 30+ years combined experience, but low interest rates and an active market have certainly helped.

Our goal with almost every listing is to get it into a solid escrow within 30 days, and preferably within the first two weekends.   Over the years, we’ve found out that’s the key to getting top dollar.  After a month, buyers and sellers both lose interest.  Buyers figure if nobody’s bought it after a month, it can’t be that great a deal, unless the home has some extremelyy distinctive features.  Most sellers can only keep a home looking it’s best and put up with the hassle of showings for a month, if that.  As one wise Realtor once told me, “If it sells in the first month, everybody’s happy.”

However, in a slow market, it’s a lot harder to get a home sold in a month.  And most of Southern California’s real estate agents had never seen a really slow market until this one hit. Blair & I had to revert to what had worked for me during prior slumps:  1980-82, 1985-86, 1989 and 1991-95.  This time we’ve had to adjust for the internet, technology, & the fact that buyers now have direct access to listings, but the basic principals remain the same.

It takes a skillful combination of preparing and staging the home; accurate pricing; effective, targeted marketing; careful negotiating and screening of buyers, and continual vigilance during escrow.   Doing  dozens and dozens of things right.  We’ve got it down to the day of the week our listings go into the local M.L.S.

But all of that works better when the market’s more active.  Which is why we believe our successes overt the last half of February are a good indicator that this spring may provide a window of opportunity for both sellers and buyers throughout Southern California.

Trouble Making Your Mortgage Payments? 7 Ways to Get Back on Track

With home prices down 10 – 25% in Southern California, we are increasingly encountering clients who don’t know what to do when they need to sell or refinance in today’s troubled real estate and mortgage markets.

Of course, if you’ve got enough equity in your home, selling or refinancing is not such a problem, although you’ll net less cash out than you would have a year or two ago. We’ve got lots of ways to help sellers maximize their net in today’s market, but that will have to wait for another post. (If you can’t wait, call us at 562 822 7653 or post a question in the comments below & we’ll give a brief summary)

The real crunch comes when you owe more than 90% of what your home’s worth. For refinancing, that’s because 100% refinance loans have largely disappeared.

For sellers, it’s because the total cost of selling a home today generally runs between 8 – 12% of the sales price (escrow, commission, termite, title, home warranty, & often points and incentives).

As we see it, homeowners with little, no, or negative equity have at least 7 options:

1. Live with your existing loan the way it is. If you can make the payments and plan to live there for a long time, you’ll eventually be fine. Depending on when you bought, what you put down, & when the market recovers, it may take 2 – 10 years, but inflation eventually should bail you out. (For our projections for Southern California housing, check out “A Change in Our Projections?”)

I’ll bet your car, clothes, appliances, and furniture are all worth less today than what you paid for them, and they’re not expected to go up over the next 2 – 10 years, either. However, if your loan is scheduled to adjust up to where the payments or interest rate is unreasonable, option # 2 is worth trying:

2. If you’ve got one of those killer loans that’s already adjusted up or will shortly, try to negotiate with your lender for better terms. It’s never a good idea to just give up without at least trying to work something out. It doesn’t hurt or cost anything to ask. You might ask to have the interest rate reduced or held at the current low level until the home goes up in value enough to allow you to sell or refinance. Lenders are much more willing to negotiate if you have a legitimate hardship, but if you didn’t have a hardship you probably wouldn’t have a problem making the payments.

Bad loans had a lot to do with the current real estate mess (see “How We Got Into This Mess“). If your loan was misrepresented by your lender, you might mention it in a matter-of-fact, non accusatory way.

3. You could also try to negotiate for a reduced principle balance to allow you to refinance or to at least make the payments on the current loan. This is sometimes known as a “cram down.” If there’s no equity, they really don’t want your home back, & they could lose a lot more if they had to foreclose. As an added incentive, you might propose some sort of equity sharing arrangement as partial compensation, although I wouldn’t start off with that, & I’d try to keep it modest.

4. Negotiate a “short sale” with your lender. The lender reduces the payoff amount to allow you to close escrow with little or no out of pocket expense. Most lenders prefer this to a foreclosure, but they can be tough and sometimes unreasonable. Still, we’ve been able to negotiate payoff discounts well over $100,000 for a number of our sellers over the last year, just as we did during the 1991 – 1996 downturn. In fact, lenders seem to be more reasonable and more eager to deal this time around. If you’re going this route, you need an excellent, experienced negotiator on your side; the bank’s got plenty of them on theirs. Most real estate agents will tell you they can do that, but if they don’t have at least 15 years experience, I’d avoid them.

In fact, before talking to any agents, check out our post on “Top 5 Ways NOT to Pick an Agent.” You might also want to take a look at our experience & advice on “How to Sell Your So Cal Home for Top Dollar in 30 Days.”

5. Bring cash to escrow to enable a sale or refinance. During the last recession, we saw many sellers write checks to escrow for thousands of dollars to enable them to sell. This keeps their credit & their conscience clean, while allowing them to move on. For those with significant assets, it’s worth considering.

6. “Give the home back to the bank.” This is generally referred to as a “deed in lieu” of foreclosure, and it still saves the bank time and money over foreclosing. However, if there are other encumbrances (2nd T.D., equity line, judgements, tax liens, etc.) they may prefer to foreclose, to wipe out those junior liens.

7. Let the lender foreclose. In California, that give you a minimum of about 120 days you can live in the house without making payments from when the lender files their Notice of Default (you’ll get a copy!). That “N.o.D.” usually isn’t filed until you’ve missed at least two payments, sometimes a lot more.

Here’s some possible steps to figure out which option might work best for you:

1. Pray, if you’re so inclined. In this case, it wouldn’t be a bad idea even if you’re not so inclined! We could all use some divine wisdom & intervention to get through the current mortgage mess! Like I said above, it never hurts to ask!

2. Get the facts on your loan. Review your last statement to find out exactly what you owe. Check your loan documents or call customer “service” to find out when your payment will adjust & by how much. (If you call, & you’ve got a big bump coming, you might want to try this when they tell you: Inhale sharply, then say “Oh no! I don’t know how we can handle that!” Then shut up & wait to see if they offer anything. Silence is one of the most powerful of negotiating tools, & whoever speaks first to break the silence usually loses.)

3. Get the facts on what your home’s worth. I suggest calling an experienced, honest, full time, diligent Realtor. We’d be happy to refer one, or possibly even help you out ourselves. 562 822 SOLD. Or e-mail RealtorDaveE at msn dot com. (Use the symbol @ for “at” and a period for “dot–” we have to be careful to avoid spamming web crawlers, sorry.) The agent can also give you a more accurate idea of your costs of sale and what preparation & staging would be best. We don’t recommend selling by owner or using a part-time or inexperienced agent in today’s market.

4. Consider the tax, credit, & ethical consequences of the various options. Tax wise, the recently passed federal Mortgage Forgiveness Debt Relief Act of 2007 can save thousands in tax for most borrowers exercising options 3, 4, 6, or 7 above in 2007, 2008, or 2009. Don’t ignore the ethical implications–I can’t think of anyone who’s ever regretted doing the right thing, but lots of people who’ve regretted unethical behavior. Credit wise, options 1 & 5 shouldn’t hurt your credit at all, neither should option 2 in most cases. Options 3 & 4 are generally considered less harmful than 6 or 7, especially if you continue making payments, but you’ll want to ask your lender if & how it will be reported to the credit bureaus.

Obviously, this post is general in nature & you should consult the appropriate legal, tax, real estate and other professionals for your specific situation & state. Our point is, you do have options, and doing nothing is generally considered the worst option of all. Good luck, & let us know how things work out!

As always, your thoughts & comments are welcome.