So Cal Real Estate News

Note: Special 2 hour, $5 buyer seminar with Blair & Dave set for Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.). We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs!

It wasn’t that long ago that Blair and I thought Southern California home prices were most likely to begin to rebound in spring of 2010.

Near the end of July we made an upbeat revision in our forecast, giving a 40% probability Southern California home prices would bottom this coming winter, a 40% chance of our price bottom coming the following winter, and a 20% of our bottom coming after that.  We also began specifying which areas and price segments can be expected to bottom first.  (For details and our rationale, check out “An optimistic update on our projections of a home price bottom.”)

Now we’re getting even a bit more optimistic, largely due to modest declines in homes going into foreclosure combined with the rapid decline in prices over the past year.

Nobody can say with certainty when Southern California home prices will hit bottom (See “How low will prices go?“).  DataQuick’s numbers won’t reflect that bottom until long after it’s passed (see “Two big problems with DataQuick’s monthly median price reports“).  However, there comes a time before the price bottom in every market cycle where the wise buyer starts looking very seriously.

I think that time is now.  In fact, last week I put in my first offer on a California property in over ten years.  (Last month I also decided to run for my local City Council for the first time ever, but that’s another story for another blog.)

Let’s take a close look at some questions this raises, including where, what, and why to buy now:

Where to buy now: While we believe recovery for the desert area and the Inland Empire may not come unti spring of 2010, we now believe the next four months are likely to present the best buying opportunities for most property classes in the coastal plane of Los Angeles and Orange Counties.

Why? As we’ve indicated in “Our Two R.E. Market Cycles,” in most years both sales volume and prices for homes going into escrow tend to bottom in November and December. People are too busy preparing for the holidays to buy homes but lenders and builders are trying to unload inventory before year’s end.  It’s almost like an annual “year end clearance” sale for real estate.

With the number of homes going into foreclosure beginning to decline and effects of the federal housing relief bill beginning to kick in (see “The good news about the ‘Housing and Economic Recovery Act’ “), we think the odds now are that this winter’s apt to be as good as it gets for buyers looking in the more built out areas of So Cal.

What’s more, interest rates are still near historical lows and are expected to gradually rise over the years ahead.  Very low prices and rates make for an excellent buying opportunity.

Finally, there are literally hundreds of thousands of buyers sitting on the fence right now waiting for the market to bottom.  Once they all sense the time is right, you’ll have far more competition from other buyers than you have right now.  If you’re not early, you’ll be late.   Once everybody recognizes a golden opportunity, it’s too late to take advantage of it.

Due to the annual cycle, we know activity’s apt to pick up starting 12/26, we think the prudent buyer should at least get her feet wet in the market now.

Who should buy now? Buyers who have fairly decent credit, access to a down payment of at least 3.5% (the new FHA minimum), stable income, and who aren’t planning on selling in the next five years.  (3-5 years used to be the rule of thumb for accumulating enough equity to cover selling costs.  1-2 year “flipping” for anything besides severely distressed property is probably a thing of the past.)  It’s also not a time for negative amortization loans, or adjustable mortgages with low teaser rates and payments that will rise dramatically.  We recommend 7 - 30 year fixed, fully amortizing loans.

What to buy now? We think lower end Single Family Homes (SFRs) will rebound first, as they’ve been driven down the most by foreclosures.  Starter condos, which were overbuilt more than SFRs in LA & OC, will probably lag behind.  Quite likely move-up homes will also lag, since most buyers need to build up equity in their current home in order to move up.

We also like the discounts available on “short sales.”

What’s a “short sale?” In a  “short sale” the current mortgage holder accepts a reduced, or “short” payoff at close in order to avoid foreclosure.  It actually takes longer than a normal sale or a bank foreclosure, and you can expect the current mortgage holder to attempt to renegotiate or even cancel the sale.  I got plenty of experience with short sales back during the 1991 - 1996 SoCal real estate crash, and so far Blair and I have closed every short sale we’ve opened.

Why the discount on short sales? For agents, short sales are twice the hassle for 1/6 less commission, since the mortgage holder always insists on reducing the commission as a condition of accepting the short sale, if they’re willing to accept it at all.  Buyers would also rather avoid the renegotiation hassles not to mention the chance of the current lender disallowing the losing the home 30 - 60 days into the escrow.  As a result short sales often go for 5% - 15% below market.  And market is already 25% - 40% below what it was at the peak.

What about foreclosures? Once the bank takes the home back, the hassles of a short sale and the reduced commission are both eliminated, so the demand increases.  Some REOs (”Real Estate Owned,” or lender-owned, foreclosed properties) are initially overpriced.  When an REO is underpriced, the lender may wait 7 - 10 days before accepting an offer, essentialy holding an auction so that the price will get bid up, sometimes actually selling above market.

When should I start looking? Preferably September or early October.  That way you’ll have time to look and to familiarize yourself with your options.  Some experts say you should look at 20 similar homes before making an offer.  With the internet, it’s not that hard.  You can search for yourself using the links to Southern California Multiple Listing services in the column to your right.  Better yet, we can set you up on the MLS’s “Listing Book,” which allows you to sort out the listings you prefer.  (Just shoot us an e-mail at BlairNewman at verizon.net.  (You know what the “at” represents, but most web-crawling e-mail harvesters don’t.)

It’s also good to start looking now so that if you find a short sale you like you’ll have time to give it a shot, & still have time to look and write other offers if the current lender plays hardball 45 days down the line.

What if prices continue to drop next year? We think the odds are against that, but nobody can say for certain.  What we do know is that prices have already fallen by about a third from the peak.  By staying in developped areas, you minimize the risk of dramatic additional falls.  Of course, if the economy takes a major turn for the worst while you’re looking, you can always wait.  Check back with us, or sign up for our RSS feed, to see our take on future developments.

How do we get started? First, talk to an honest, reliable lender (if you don’t know any, we do.  562.822.SOLD).  Find out what you qualify for on a fixed loan, if you need to work on your credit, how much down you’ll need, etc.

Then find an honest, experienced, diligent full-time agent.  Not someone you know at work (they’re not full-time, no matter what they say), probably not a relative, and not a friendly person you meet at an open house.  At least five years in the business, at least 50 closed sales, at least 5 of them in the neighborhood you’re interested in.   Again, with 30+ years in the business, we can probably find someone good for you if you can’t.  If you’re thinking southeast L.A. County (Long Beach, Lakewood, Norwalk, Cerritos, etc.) or west or North Orange County (Cypress, Rossmoor, Seal Beach through La Mirada and La Habra), we’ve got many years experience there ourselves, with over 500 homes sold.

You may decide you want to wait a little longer, but you may also find your dream home & be able to negotiate a great deal.  Whatever you finally decide, now’s a great time to get started.  There’s a very good chance it may be the smartest financial decision of your life!

Pragmatists in the Bush Administration may be gaining the upper hand, according to “Bush Readies Mortgage Aid Plan,” in Saturday’s Washington Post.

According to the article, “The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds.”

The proposal targets at least some of America’s estimated 9 million “upside down” homeowners. Under the plan, the FHA “would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government,” according to the article.

This appears to be a modification of a proposal by Massachusetts Democrat Barney Frank, reminding us all that politics, indeed, does “make strange bedfellows.” (I’m available, Mr. Letterman. )

We think it could be a major step in the right direction–or a major disaster. As always, “the devil is in the details.” We just hope & pray that our employees in Washington (yup–we pay their salaries!) will finally put special interests, dogma, and party politics aside long enough to work for the common good.

In the meantime, if nothing else, it’s one more illustration of what we wrote last November in “How Low Will Prices Go?”–we’re in uncharted territory this time, and nobody really knows what will happen next! (If you predicted a Barney Frank/George Bush recovery plan, please let me know so I can get your input on my stocks & the Final Four next weekend!)

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.  To get an idea of what they actually do, take them to your computer and ask them to pull up their listings on the web.  Read the remarks, check out the pictures, see how complete the data is.  Then ask to see the web sites for their current listings.  (For comparison, Blair and I buy a separate, appropriate internet “domain” name for each listing and then shoot our own virtual tour.  For example, check out LosAlDreamHome.com, which we shot July 24, 2008.

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.

If you missed the first half of this post, just click here for numbers 6 - 10 of the most common mistakes sellers make in choosing an agent.

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.