So Cal Real Estate News

As you may know, a few weeks ago we started what we hope will be the first of several local real estate blogs with LakewoodRealEstateNews.com. Blair and I work both sides of the L.A./Orange County line, and we hope to later add possibly Long Beach and West Orange County blogs as well, maybe more.  You can’t live in Southern California for over 50 years and sell real estate here for almost 30 without getting to know quite a few communities.

Earlier today we put up a post there based on my first home purchase way back in 1976.  We focused primarily on some unique situations in Lakewood, but there are some interesting issues that apply to most Southern California communities.  Especially interesting was a price and rate comparison between 1976 and 2008.  Maybe we’re closer to the bottom than I thought, even with IndyMac’s failure today and all the problems with Fannie Mae and Freddie Mac.

If you’re interested, this link will take you straight to today’s post, “How to pick a Realtor:  Don’t make the mistake I did!”

Enjoy. . . and learn–from my mistakes!

This is the third in a series of of three posts on three listings on the same block that closed escrow earlier this year. The first two are good examples of costly but common seller mistakes. (See “A Tale of Three Listings: The probate seller’s big mistake” and “The “flipper” Realtor who didn’t think.”)

Today we look at the third listing, a good illustration of what’s going on throughout Southern California right now. It shows how we got into this mess and what it takes for homeowners to get out of it.

Meet the Johnsons:

This seller first called us around the first of the year. We’ll call them Mr. and Mrs. Johnson. They had purchased the home in June of 2002 for $275,000 with 20% down. They refinanced two years later for $325,000 and again in 2006 for $338,000.

Refinancing every two years is generally better for the mortgage broker than the homeowner, but these owners were relatively conservative. Not only did they avoid negative amortization loans, they also resisted the temptation to pull out the bulk of their equity. Otherwise, they could easily have owed over twice as much as they did.

When we first met, there were about six home listed within 150 yards of their home, including “short sales” next door and across the street. That sounds like an Inland Empire or ghetto listing, but was actually just an unlucky block in a decent part of Lakewood.

Like most sellers, the Johnsons knew that values were down, but still had unrealistic expectations for their home. Even in normal markets, most sellers tend to overprice their home, giving value to personalized “improvements” that actually are negatives to most buyers, and overlooking negatives they’ve grown accustomed to.

When we prepared for our appointment, we were pleased to see that they still had equity in their home, but it was far less equity than they had expected. However, their personal situation was such that it was a good time for them to move. They wisely chose to let their personal situation guide them in an uncertain market, rather than speculate on when the bottom might come (see “What to do when nobody knows what’s next“).

Getting Ready

Unlike many sellers, they were willing to listen to our recommendation, not just on pricing but also on timing, preparation, and staging (see “How to sell your So Cal home for top dollar in 30 days“):

• Preparation: We suggested adding some flowers in the front, fertilizing the lawn, and repainting the chipped & peeling front porch, and removing posters and repainting the teens’ bedrooms.
• Staging: This was a large home with an unusual floor plan, including a huge master bedroom with some unused space and a small utility room with a half bath.

Partly because the average seller is about 20 - 40 years older than their most likely buyer, most sellers aren’t aware of how visually dependent their buyers are. Verbal suggestions aren’t nearly as effective as properly staging a home.

In this case, we suggested using a bookcase to seclude a part of the master as a semi-private office or retreat. We felt that the utility room with a private half bath should be staged as a bedroom, and offered the use of one of our inflatable twin “instant” beds. This would also enable us to list the home as a four bedroom, two bath rather than a three bedroom with utility room, without potential buyers asking “Where’s the bedroom.”

As almost always, we also recommended removing or relocating some furniture to make the home look larger, as well as eliminating knick-knacks and clutter.

• Timing: Aware of the coming onslaught of foreclosure listings we strongly recommended the Johnsons waste no time getting their home on the market.
• Pricing: Correct staging and preparation would significantly improve the sellers’ bottom line, but locating and closing a qualified buyer using today’s tighter lending standards is often a major challenge.

The first week a home is on the market is the best opportunity to get competing offers.  So it was critical to hit the market with all staging and preparation done, and to hit it at an aggressive price. Our hope was to obtain competing offers within the first two weekends, not only so we would be in a stronger negotiating position, but also so we could focus on the buyer most apt to close the escrow.

• What not to do: Fortunately, the Johnsons called us early in the process of deciding what to do. Not only did that allow us to encourage them to speed up the process to take advantage of early spring activity in a falling market, but it also allowed us to help them focus their preparation efforts on the most productive items.

As is commonly the case, there were several repair items they wanted to fix that we felt would be better left for the physical inspection once we had a buyer. That not only saved time and effort, it also allowed the buyers to pick the repair items that were most important to them.

The Team Effort:

In order to get things moving quickly, we completed the listing paperwork that night, with a target of getting the home on the market in a few weeks, once the work was done. We agreed on a tentative list price, which would be adjusted as needed just prior to putting the home on the market.

We were amazed at how efficiently the Johnsons went to work. The bedrooms were painted and lawn fertilized within a few days. Furniture was moved out, and our “instant bed” was moved in.

There were, however, a few areas where disagreements arose. The master retreat was set up with a desk from the former utility room, but the bookcase screen never made it.

We never fully agreed on pricing, although we were only off by a few thousand dollars. In a challenging market like today’s, accurate pricing from the start is quite important. As with proper staging and preparation before hitting the market, “you never get a second chance at a good first impression.” That’s especially true now that listing information travels at the speed of light over the internet.

Still, it’s the seller’s house, and all we can do is explain our recommendations. We were very fortunate the Johnsons worked so well on preparation, staging, and timing. And we weren’t that far off on pricing, but things might have gone smoother were the initial price just 1% lower.

Our Part:

It’s not just the seller who has to work hard in this market, however. As the Johnsons were preparing the home we began working on our marketing plan into play. We’re constantly looking for and trying out new ideas, and over the last three decades we’ve incorporated quite a few that have proven effective. Selling a home for top dollar fast isn’t rocket science, but it does involve doing lots of little things right. In the Johnson’s case, this included:

• buying the home’s address for the domain for the home’s website & getting a sign printed with the domain. (1234Main.com, for example–much easier to remember than “12J75jKR Wxyz@prudential.yahoo.homes.com or whatever)
• videoing the virtual tour
• photographing, writing & printing the color flyers for inside the house & for the brochure box
• preparing 19 photos for the MLS & adding captions
• recording an audio tour & put up our call-capture “audio tour” sign so we could follow-up with buyers while they were still in front of the house.
• putting up our personalized “for sale” sign with only our cell number on it, so all calls would go to one of us, not some 18-year-old receptionist who’d never seen the house (or an agent taking “floor time” who’d rather sell the buyer his own listing).
• holding open houses with about two dozen strategically placed signs.
• over 400 flyers delivered throughout the tract to neighbors who might have friends or family looking to buy in the neighborhood.
• Bringing our local office through on tour.
• Precisely timing the inputting of the listing into the M.L.S. and onto the internet to maximize the possibility of multiple offers (we’ve actually go this down to not just which day of the week but also what time on that day.) (Sorry–that’s our secret, but we know what works. It changes based on the market anyway.)

The Results:

The good news was, we had an offer within the first two weeks, and were able to negotiate a mutually acceptable price and terms. The “challenge” (we try to avoid words like “bad news” or “problem”) was, the buyer wasn’t as strong as we would like, in terms of qualifying for the loan. They weren’t terrible, probably a little stronger than average. They were even “pre-qualified,” but that really doesn’t mean much if you check out the fine print. They were still weaker than we’d prefer.

So we dragged out the negotiating process a bit, checked with other potential buyers, but nobody else appeared, and that initial burst of activity when a new listing hits was dying down. The home was fairly unique, which also limited our pool of buyers. The seller was firm on their price, so we went with the only buyer we had. In this market, you can be too choosy.

Unfortunately, in these days of ever changing lender requirements, the lender modified the loan requirements during the escrow, if the buyers’ agent is to be believed. (BTW, the buyers’ agent is never to be believed, but there’s only so much a third party can verify. Shoot, even Presidents have been known to lie under oath!)

The buyer really wanted the home, and kept searching for a loan that would work, but after a few weeks we put the home back on the market to see if we could find a stronger buyer. Unfortunately, we were right about the declining market as well as the uniqueness of the home. We couldn’t find another buyer quite as willing to pay top dollar, but after about a month back on the market we did find a buyer who was able to successfully close the sale in less than a month within 2% of the original asking price.

The sellers are now happily moved into their new home and are getting on with their lives in the location that’s right for them. Meanwhile, four of the other six listings on their block have not yet sold, and the other two both eventually sold but for almost 20% below their original asking prices.

Bottom line:

• Sellers today need to be flexible and willing to expend some effort.
• Find an experienced, honest, diligent Realtor (or two) as early as possible.
• Take your agents’ advice very seriously.
• Beware of letting market timing or wishful thinking trump your personal needs.
• Get it right the first time–condition, pricing, staging, marketing & listing agent.

That’s what we think–we’d love to have you add your comments, thoughts, or questions below.

This is the second of three posts on three homes that recently closed escrow on the same block in Lakewood, CA. The first was “A Tale of Three Listings: The probate seller’s big mistake,” and in a few days we’ll post the last, “The team that made it happen.”

I “flipped” my first house back in the late 1980s, before those cable networks that made “flipping” popular were even invented.

As an experienced Realtor who has advance access to listings & who can save on commissions, you might think that I’ve flipped scores of homes since then, but you’d be wrong. I’ve actually only flipped a handful or two of properties over the last 20 years. That’s partly because I’ve become more of a buy and hold investor, but it’s also because “flipping” is much harder than it looks.

In the early 90’s a colleague and former partner of mine began “flipping” homes as a business. He developed a model that worked well for him, with some unique means of acquiring the properties you won’t find at a seminar or on a DVD or TV show. According to him, the key to success was acquiring the property substantially below market. As he explained it to me once, “We’re basically pirates. The key is to steal the property.”

Each flip has to be carefully evaluated, but I want to pay at least 20% below market, preferably 25% - 30%. My colleague prefers more than that.

I have to laugh when I watch “Flip this House” and similar shows, especially the part at the end where they compute their “profits.” After spending way too much overdoing their improvements, some bright-eyed young Realtor is brought in to rave about the house & tell the flipper how much they’ll get for it.

These agents may be young, but they’re well schooled in the number #1 way to get a listing–tell the seller what she wants to hear (see ” Top 5 ways NOT to pick an agent“). They generally quote an unrealistically high price. Then on the screen the show computes the flipper’s mythical profit, completely ignoring costs of purchase, selling costs like commission, or holding costs like monthly mortgage payments.

Well, that approach to flipping may sometimes work when homes are going up by thousands of dollars every month because everybody and his dead dog can qualify for a loan (see “How we got into this mess“). But in a flat market, let along a down market, flipping calls for skills that even most Realtors don’t have.

As is illustrated by this sad story.

When this home hit the market last September, it was priced 5% - 10% below market. It was the classic case of the lazy seller and lazy agent. The home was occupied by a pack-rack tenant who also made it almost impossible to show. The correct remedy would have been to get the tenant out & do a quick & cheap fix-up, rather than drive down neighborhood values. Instead, they priced it low & sold it quick. It was the first home in the neighborhood to list below $400,00, and the agent who bought it negotiated the price down to $390,000. He opened escrow late in September and closed it mid November, according to the SoCal Multiple Listing Service.

I thought about buying it myself, but I knew prices always move lower as we move through the winter (see “Our Two R.E. Market Cycles“), and I expected the coming winter to be especially brutal. Plus, the selling price wasn’t near 25% below market.

Long story short, it was bought by an agent who bragged to me how he’d flipped 60 homes. I hope he banked his profits. He had the concepts down, but not for a down market. During the five months it took him to close escrow on his purchase, fix it up, and put it on the market, prices plummeted. He did a nice job of sprucing it up and staging it, but he was used to prices going up $5,000 or more a month. This time, they were going down.

After wasting a couple weekends trying to sell it by owner, this Realtor put the home in the Multiple Listings for $475,000 on February 8th. He eventually reduced it to $449,000, which he told me was what he needed just to break even. I guess he didn’t, because it was later reduced to $429,900. In mid April it went into escrow and it closed on May 21 at $428,000.

That was less than 10% over what was paid for the home, and resulted in a loss of over $30,000 by the flipper’s own projections. Four months of work to lose over $30,000!

In a normal market, let alone in the current down market, flipping is not for amateurs. In this case, it wasn’t for professionals, either!

Please bear that in mind next time you’re watching “Flip this House!”

In a few days, we’ll discuss the third sale on this same block, “the team that made it happen.”

Today we take a look at the first of three listings on the same block that closed escrow in the last few weeks. Two of the homes illustrate common but very costly mistakes sellers make. The other illustrates both pitfalls and strategies for success in today’s market.

Let’s call them “the probate seller who didn’t listen,” “The “flipper” Realtor who didn’t think,” and “The team that made it happen.” Today we’ll take a look at . . .

“The Probate Seller who Didn’t Listen”

We first met “Sue” last fall, shortly after her mother died. Sue was the executrix, and wanted to talk to us about selling her mother’s home.

We met at the property in late September . The home had a lot of deferred maintenance, but Blair & I both thought the family would be wise to get the home on the market quickly. We were pretty sure that the market’s downward spiral would only be made worse by the approaching winter slow season (see “Predictions 101: Our 2 market cycles“).

We felt with a little intense effort the home could be in escrow before the winter holiday slowdown, and we were happy to do our part to help. That included advancing money for some needed work, assisting with several other things to speed things up.

We knew what needed to be done in the face of a market we knew was moving down quickly, and we were willing to devote “over and above” effort to make it happen. I’d rather spend a few hours moving furniture in October than days sitting a slow open house in December.

We also had another reason for trying to move things along. After years of handling probate sales, we’ve learned that closing the sale on the family home, while difficult, invariably helps the family turn a page and move forward. The family almost always thanks us for moving things along.

A Lesson from an Earlier Probate Listing

We’ve closed several such sales of family homes over the last two years, and invariably the family tends to drag things out while prices decline. For example, on one Long Beach sale the two daughter-in-laws wanted to spend an estimated six months sorting, boxing, and holding garage sales on the things their father-in-law had accumulated over fifty years in the home. We advised the family that not only would that prolong a painful process, but the home was almost certain to decline by thousands of dollars every month they delayed.

“You’ll waste six months of weekends, make a few hundred dollars on the garage sales, and lose tens of thousands of dollars on the sale of the home,” I advised them. “Do you really think that’s what Dad would want?”

Most husbands know it’s dangerous to get in the way of a wife with a plan. (I imagine wives experience the same issues with husbands with a plan, since all of us tend to be stubborn, but I can only speak as a husband.) The two daughter-in-laws had their game plan, but fortunately for everyone, the husbands took our advice.

It only took the family one weekend to get what they wanted out of the house. We’ve developed a lot of resources for situations like this, from wholesale auction houses to antique dealers to non-profit thrift stores like the Salvation Army and Food Finders that will actually clear out your cupboards for you. Not to mention painters, handymen, and rehab people. In fact, I’ve got to finish this post pretty soon so I can get over & check on a crew that’s refinishing floors and painting the inside of a listing we just took.

Amnyway, in about two weeks, that home was on the market, in another two it was in escrow, and our swift action saved the family at least $50,000 of their inheritance. By the time we were done, the whole family was glad they listened to us.

A Different Story This Time

Back to the seller who didn’t listen. To speed things up, we began some initial work right away, arranging for a garage sale and large item pick up to help with the staging as well as a termite inspection to identify what required corrections we might want to take care of in advance to improve marketability.

The seller wanted us to meet with her and her husband to complete the listing agreement, and we kept encouraging her to move things along, but other things kept coming up. First they were going to be out of town, then they had guests visiting, then it was something else.

October is generally a decent month for selling, but as you move into November things slow dramatically, and we knew this winter was going to be especially brutal. (DataQuick and other closing reports reflect this slowdown in the months when those sales close escrow, which is why January and February are normally bottoms for closings, as we explain in “Two big problems with DataQuick’s monthly median price reports“).

We were just trying to move things along in a timely fashion, but the Sue the executrix/seller just had other priorities. We knew that this wasn’t going to be as difficult as Sue thought, & we were ready to help expedite things to make it easier on the family.

There is a tendency for people to list with someone who just tells them what they want to hear. We were telling Sue that the winter holidays were breathing down our neck, and time was of the essence. We also felt some minimal cosmetic improvements would go a long way to maximizing the family’s proceeds. And we were willing to advance the money and arrange for the work.

Now, you can’t survive in this business for 28 years without learning how to be diplomatic, but sometimes people just don’t want to hear the truth no matter how diplomaticly it’s presented.

So Sue went out and found an agent who would tell Sue what she wanted to hear, and that was the last we heard from Sue.

Three months later, near the end of January, the home was listed with a fairly experienced local agent who apparently saw no time urgency nor any need for cosmetic improvements. By then, prices had dropped about $40,000 in the neighborhood. No painting, staging, or corrective work was done, another big mistake in our opinion, but not as big as the delay to market. A few months later the price was reduced by $40,000. Two months after that it went into escrow for $30,000 below that reduced price.

It finally closed escow in mid May for $320,000. I’m fairly confident that, had the seller followed our suggestions and time table, we could have sold it for around $425,000, with around $5,000 of painting and work. So in exchange for not having a “pushy” Realtor, Sue lost her and her two sisters about $100,000 and six months.

One Big Mistake

Sue’s main mistake was ignoring the advice of an experienced agent who knew what he was talking about. Instead, she listed for the most common wrong reason out there: Sue found an agent who told her what she wanted to hear (see ” Top 5 ways NOT to pick an agent“).

Disclaimer: I’m not saying experienced Realtors are infallible. (For example, in December of 2007 it appeared to me that the market had bottomed. That was based on an unseasonable December increase in sales and prices. Indeed, that pickup I noticed resulted in DataQuick’s reporting a peak last spring. But I didn’t see last spring’s increase in interest rates, and greatly misjudged the impact of the sub prime crisis. On that one, I relied on the input of the “experts” like DataQuick’s John Karevoll. A really big mistake!)

But I am saying that a thoughtful, honest, experienced table probably knows things the average seller doesn’t. His or her input is worth considering. It’s foolish to simply reject something you don’t want to hear. It’s even more foolish to pick an agent just because he tells you what you want to hear, no matter how enthusiastic he is in agreeing with you. But that’s much easier said than done.

Telling the sellers what they want to hear is the easiest way to get a listing, and almost every agent knows it. In this market, it’s also the easiest way to cost the seller money and to take a listing that expires.

Never make your decision based on the agent’s analysis–instead, check out the agent’s track record and experience, and talk to sellers that agent currently has listed (ask her to bring a complete MLS print-out of all their listings for the past two years. Then ask another agent to print out the same list and make sure the two lists match.)

In a difficult market, picking the right agent is probably the most important decision you’ll make. For more tips on agent selection, you might also want to check out “<a href=”http://socalrealestatenews.com/blog/top-10-ways-not-to-pick-a-listing-agent/” target=”_blank”>Top 10 ways NOT to pick a real estate agent</a>”.

So that’s the sad story of “the probate seller who didn’t listen.” Next is the case of “The “flipper” Realtor who didn’t think,” a home across the street and down from Sue’s, and how that home, like Sue’s contributed to the entire neighborhood’s decline in value.

Please feel free to add your thoughts or questions as a comment below.

Foreclosures are up, sales are up, closings are tougher, and rental vacancies are down.  And one of the smartest investors I know is making offers again, even as he puts his own home on the market.

That’s what we’re seeing from both sides of the Los Angeles County and Orange County lines.

Total Southern California homes available for sale, from Santa Barbara to San Diego, stands at about 163,500, which is down about 3% from the 169,000 we peaked at about three months ago. In less built-out Orange County, inventory is down more dramatically.

David Haas, our favorite local property manager says his vacancies have declined, largely due to an influx of former homeowners vacating after foreclosure and/or short sale.

The managing partner at the real estate office we work out of reports new escrows for April were the best in about nine months, before the subprime crisis. April’s numbers were modestly better than February’s, with March serving as a trough in between. This is actually fairly typical in real estate–many agents tend to get one or two deals into escrow, then focus on closing them before opening new escrows.

However, escrows remain difficult to close, for several reasons. The reason you hear about most has to do with the difficulty qualifying for a loan, and who can blame lenders for tightening up, given their current onslaught of foreclosures. Of course, sub-prime loans have pretty much dryed up, and most lenders are looking for at least 10% down and good FICO scores for no-verification loans. In problem areas with lots of foreclosures, FHA is requiring 5% down, rather than the traditional 3%.

Some escrows are harder to close because they’re “short sales,” where the current lender must accept a discounted, or “short” payoff in order to facilitate a sale and avoid foreclosure. It’s not uncommon for these to fall out of escrow, either due to the lender refusing to accept the discount, making unreasonable demnads, or just taking too long to respond.

However, enough sales are falling out right now that we’re starting to put in “back up” offers on occasion.

As discussed in our prior post, DataQuick’s latest Orange County medians indicate a modest increase in prices as well.

What’s it all mean? Well, the increase in pending sales & prices is pretty typical for springtime (see “Predictions 101: SoCal’s 2 market cycles“), so that doesn’t prove anything in itself.

However, with the ever increasing number of foreclosed homes hitting the market, stabilization in prices is a good thing.

Have we hit a bottom? In number of sales, we’re pretty sure we have. In price, we’re not so sure. The dramatic and rapid decline in home values is bringing buyers back into the market, but continuing foreclosures are keeping the inventory high. As we move into fall and winter, the number of buyers normally decreases, but most indicators are that foreclosures will continue strong through November at least (See “SoCal defaults up: What it means“).

Two key factors are mortgage interest rates and the economy. Were rates to decline, that could bring in more buyers, but long term rates are slowly moving up. Rising inflation will probably continue that trend, at least over the short term.

As for the economy, it’s hard to say, but interest rates and economic indicators move in opposite directions, so there’s some automatic self-correction there. If the economy continues to falter, longer term rates are apt to decline. If the economy starts picking up steam rates will go up. Probably a wash over all, although a return to “stagflation” (stagnant economy with inflation), a possible worst-case scenario, can’t be ruled out.

Ironically, a return of inflation would eventually push home values higher, but would push them down short term.

There are still so many variables, we’re not ready yet to depart from our mantra, “We’re in unprecedented territory, and nobody can really know what’s ahead.”  (See “How low will prices go?“)

Here are the things we’re relatively confident of:

• Long term interest rates will continue to climb slowly for the time being.
• There’s still time for potential buyers to begin saving a down payment, but they do need to start now.
• So Cal homes are unlikely to return to their peak prices in this decade.
• If you buy a home with a 15-year fixed mortgage and do not refinance or add a HELOC or 2nd, you will own it free and clear in 15 years.
• Most of us aren’t as smart as we think we are, so if a home you like makes sense  for you with a fixed loan, and you’re not planning on moving soon, you should seriously consider buying.  We probably aren’t at the bottom, but we may be close, and nobody will know for sure until a few years after it’s passed.
• By the same token, it makes no sense to hold off on selling until you can get the ridiculous price your neighbor got at the insane peak.  If you can do most of what you want to with what your home will net today, go for it–NOW.    The next month or two might be your best opportunity for a while.
• By the same token

Last night Barb, Nate, & I went to see Ben Stein’s new movie, Expelled: No Intelligence Allowed. It’s a wry, stark, and thought-provoking semi-documentary look at how closed-minded our scientific and educational establishment has become about alternatives to neo-Darwinism.

Maybe closed-mindedness is the default setting of humankind. Something we all have to fight against. I see it all the time in the real estate world. Potential sellers call me, supposedly to find out what the current market value is of their home. Often after I review the data and explain my professional opinion, they proceed to tell me how wrong I am.

“OK,” I think. “Why exactly did you ask me to do the research if you already knew the answer?” Actually, it’s simple. They wanted me to confirm what they thought they already knew. Maybe to show the spouse how wrong he/she was. Combination of pride and self-interest. (See reason #1 of “5 reasons NOT to pick a listing agent” for more on this.) “I made up my mind; don’t bother me with the facts.”

Somehow, it seems that this human bent towards closed-mindedness is often more pronounced in those who are in positions of authority. (For examples, consider Washington, D.C., Sacramento, or, most likely, your boss.) Truly successful leaders must fight hard to keep an open mind. Because power and closed-mindedness is a very dangerous combination (see Adolf Hitler, Vietnam War, or sub-prime lending).

Well, according to Ben’s new movie, an extreme version of that sort of closed mindedness has invaded much of the scientific community. Not just “I made up my mind. . . ” but “I made up my mind & yours too!”

Closed mindedness to the point where even mentioning an opposing viewpoint can get a professor fired. Talk about “academic freedom.”

A very thought provoking movie, with a little of Stein’s wry humor thrown in. I highly recommend it. Click here and insert your zip code for showtimes.

And keep an open mind.

A week ago I told L.A. Times real estate reporter Peter Hong that much of a Realtor’s job in this market involves delivering bad news to homeowners. Pretty much the opposite of three years ago.

“You go from being like a doctor who delivers babies,” in a booming real estate market, I said, “to being an oncologist, just giving people bad news all day long.” (”Foreclosure glut further depresses housing prices“) Shoot the messenger time. Or keep dialing until the seller finds an agent who tells her what she wants to hear. (See #1 in “5 ways NOT to pick an agent.”)

Well, today brought more bad news for homeowners.

But that’s just one side of the coin. Unlike our 1980-82 housing bust, where mortgage rates topping at 16% were bad news for BOTH sellers and buyers, today’s bad news for sellers is good news for buyers.

Which can turn it into good news for some sellers who might also be buyers, and several other types of buyers:

First, this could be an excellent time to buy for “move out” sellers who are headed to more overbuilt areas like the Inland Empire, Vegas, Texas, or the Central Valley. That’s because prices there have generally dropped more than prices in Southern California’s coastal plain.

Such a “move out” seller can get her current home in escrow, then take her time looking in that outlying area, as prices continue to decline. There are plenty of homes to choose from, and lots of motivated sellers out there.

Folks who are willing to sacrifice a little temporary inconvenience for a lot of greenbacks & that elusive “perfect” home should consider renting in their new community while they continue to look. A buyer with cash in hand is in the best negotiating position, too. This move also lets you take advantage of the annual real estate market cycle (See “Market Predictions 101: Our 2 real estate market cycles“.

Second, the time may also be right for “Move Down” sellers, especially those looking to buy a condo. Since we’ve had a glut of condo building through much of our area, even coastal plain condos are experiencing rapidly declining values and lots of foreclosures.

The same goes for the more modest “starter” single family homes, which turn over more often and have more subprime loans and foreclosures. These aren’t just “blue collar” communities like Stanton or North Long Beach, but also communities like Lakewood, Cypress or even parts of Mission Viejo, which include large tracts originally build for first time buyers.

Third, this might be the right time to buy for people who are ready to settle into their dream home now. Specifically:

1. Buyers who will be living in this home for many years, and
2. Who have good credit, a down payment, and
3. Are tired of renting and are ready for the joys and trials of home ownership, and
4. Would like to start the 15 - 30 year process of paying off a mortgage so they can retire, and
5. Could use two of the three last great tax write-offs (mortgage interest, property tax, and donations), and
6. Are able to locate and negotiate an acceptable price on their “dream home.”

These buyers also might want to nail down the kids new school for next year. Maybe they’ve figured out that they want to enjoy their “dream home” while their kids are still at home. Maybe they’re concerned about interest rates going up. Maybe they know they’ve got busier times ahead & now’s the best time to look for a home & fix it up the way they want.

Maybe they know what we’ve been saying since last November: Nobody knows for sure what’s ahead. (See “How low will prices go?“)

Forth, this may well be an excellent time to buy for those whose personal situation suggests it. Someone who’s relocating into California, whether for work, family, or retirement. Someone who desperately needs a tax break. There are lots of different scenarios where personal situation trumps market speculation.

Some people would prefer to gamble with their stocks or in Vegas but not with home ownership. We believe there are plenty of things far more important than money (See “What to do when nobody knows what’s next,” “A little perspective,” and “A little more perspective.”)

Fifth, this might be a great time for buyers who appreciate the security of buying before or near the bottom.

Prices are already down 20% or more in many Southern California neighborhoods, interest rates are low, especially with inflation looming, and some special jumbo loan programs will be expiring soon. Why not take advantage of it?

Truth is, the best time to negotiate is just before the bottom. While prices don’t shoot up dramatically, the ultra motivated sellers and the super buys do disappear fairly quickly. And you never know it’s a bottom for sure until a year or two passes.

To take a very recent example, in January of 2007 we experienced a temporary “false bottom” caused by dropping rates and seasonal demand. In December I could find 10 - 12 low priced “super bargains” in Rossmoor, a popular west Orange County neighborhood. Within a month, they were all gone! We saw the same thing late in 2001 after the Fed dropped rates in the wake of 9/11.

Both 9/11/01 and 1/07 illustrate two things:

1. Super bargains disappear quickly when the market heads up.
2. You can only be sure of a bottom when you’re looking back months or even years later.

The “double dip” recession that started here in So Cal in 1989 during Gulf War I, then reversed to a new peak in 1990, then collapsed into the end-of-the-Cold-War bust of 1991 - 95 is a great example of # 2.

A personal story. During the ‘91 - ‘95 bust, Barb and I did not enjoy watching our rental homes decline in value, even as my income from real estate sales was also tumbling. But I wanted to avoid hefty taxes from selling those homes, many of which we’d owed for along time.

One day my colleague, John Spear, mentioned in passing that multi family properties in Long Beach had dropped to prices as low as four times Gross Rent. That means the price was down to 4 x the annual rent for some apartments.

Well, since apartments generally produce more income than single family homes, I decided it was time to use the wonderful tool of the 1031 Starker Delayed Exchange to convert our rental homes into rental apartment buildings. That way, even if the market continued to drop, at least we’d have some positive cash flow.

At that point, it looked like prices would continue to drop for years to come. A popular New York financial analyst wrote a syndicated column about how Southern California would never recover. Ever.

As they say, it’s always darkest just before the dawn. Turns out, I was buying at the bottom, but I didn’t know it. Possibly the best financial move (other than structured donations) that Barb & I ever made. And we didn’t even know it at the time. We were just lucky. Blessed, actually.

Bottom line?

If you can find a home you love and can afford with a 30-year or 15-year fixed mortgage, in a location you love, maybe it’s time to stop betting on further drops and become a homeowner. Even a professional gambler knows when to cash in his chips.

At least some of them. You could always pick up a rental or vacation home later on if prices continue to drop.

At least it might be time to start looking. Even if we all think the bottom’s still a ways off.

Only God knows for sure.

And He agrees with us that there are things far more important than money (see Matthew 6:19 - 34).

May 21 update: Ongoing increases in foreclosures and long term interest rates now make us more inclined to think that the bottom may be further off than we had hoped.

That doesn’t significantly alter our basic conclusions in this post, but it should at a little more caution. And a little more hope for those who are still saving for a down and seeking to improve their credit.

We recommend you check out today’s post on the subject: “Oh-oh! We just passed a nationwide bottom!.”

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.

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.

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.