Q. I own property; the value is dropping by the day and will continue to do so for at least 4-6 years. What do I do? 

A. You have several options: 

1.) You could bury your head in the sand, refuse to acknowledge the reality of the declining market and are still in the early phases of experiencing and instead hope that it will get better, ultimately this will lead to a foreclosure, or 

2.) You can try to ride it out and rent the property, or 

3.) You can try to work out a short sale or something similar with your lender, or 

4.) You can be aggressive and sell the property now at whatever the market will give you, because it is more than what you will get during the next few years.
 

Q. So if I wait, nothing happens and I go into foreclosure. Can’t I just give the property back to the bank? 

A. You can, and an interim step may be a deed in lieu of foreclosure, and the bank will resell the property after incurring their 20-40% in costs. You will of course sacrifice your credit for an up 7+ years. You may also owe the bank the difference between what they sell it for (minus their costs to sell) and what you owed them (plus their cost to foreclose, late fees, interest, and penalties). This may well end up being reflected as a deficiency lien or judgment of a very large dollar amount. 

Q. I don’t need to sell; I can afford to wait, so why not just rent? 

A. As more and more properties are foreclosed on, as fewer and fewer properties sell and as prices continue to decline – do you foresee rental rates going up or further down during this correction when literally thousands and thousands of owner are trying to rent their properties? Your cost of owning residential real estate is approximately 1% of the value of the property each month. Right now the cost of renting a property in this market versus buying the same or similar property is around 30%. Meaning that to own a $1million home will most likely cost you at least $10,000 per month. Renting the same home will cost you $3,000 or so per month. When renting you have no capital at risk and don’t have to worry about an unstable market. Take a second and add up the following costs for your property: 

Taxes – Will they go down as fewer and fewer people pay them and fewer sales takes place? 

Insurance – Will this go down as fewer people can afford to pay it so those who can have the risk spread to them? 

Maintenance – What does it cost to keep the property in good condition? 

Vacancy – What percentage of time will the property be vacant or without income? 

Tenant issues – Will all your tenants pay and maintain the property?  

HOA/Condo fees – As fewer of your neighbors can afford to pay their share of the bills, who will be stuck to pay them? If there are unpaid, how attractive will your community be to potential buyers or tenants? 

Interest – If you have a mortgage what is it costing you per month? 

Potential earnings – If you don’t have a mortgage, what could you do with your cash if you had it out of the property? They claim Wall Street averages 10% per year. If you invested the equity in your property, what would that be worth each year? 

So, what’s the total of these numbers? How does it compare to the rent you are going to receive, if you can find a tenant? If you can afford to not sell now, you are probably savvy enough business person to see that it makes a lot of sense to go ahead and a sell while we are still near the peak.
 

Q. What is a short sale, and how does it work? 

Q. How aggressive do I need to be to sell this property right now and put it behind me? 

A. It’s all a matter of value. With the huge and growing supply we have and the normal demand we are seeing. We have to aggressive in 4 areas: 

#1. We must be at least 5-10% below the lowest of our competition based on age, area, size, and price just to get traffic through the property. 

#2. We must be attractive to agents working with buyers, so they want to show ours instead of the competition. 

#3. We must aggressively work to go find buyers everyday, instead of waiting and hoping the buyers will find us. 

#4. We must be creative as maybe necessary to structure unique deals getting any and all possible interested buyers into position to buy your property.
 

Q. What is happening to the market? 

A. The market hit its last bottom around 1992/3. From there it slowly improved until the late 90’s and then a little more rapidly until 2001 when, technically, it had just about peaked. Then of course 9/11 took place, interest rates were forced artificially low, billions of dollars left the stock market and people who were looking for safe investments were sold on the idea that baby boomers will pay a fortune for properties in the next few years. This combined to create a great deal more demand than supply at the time. This of course pushed up prices in a manner previously never seen before. In October 2004 the supply started to consistently outpace the demand and by spring 2005 the market peaked. In effect this created about a 12 year up cycle. Normally, in a high appreciation market you see a 3-5 years of up followed by about 2 years of down. The 1993-2001 up was quite long by conventional standards, you would have mostly likely see prices correct to 1999-2000 levels after what should have been the peak. Instead, we experienced the craziness real estate market with outrageous prices. While no one can know with 100% certainty, it appears likely that the next bottom will be at a pricing level comparable to values in 2002. We are still seeing supply grow as new construction typically takes years to wind down to a halt. 

So do you sell now? Do you ride it out until the bottoms, most likely 2010-2012, then wait to who knows how long for the market to be back up to where it is today or even higher? Do you bury your head and just ignore it? Do you work something out with your bank? 

I don’t know what you will decide to do, but I do know that we want to help. This is a very frustrating time for many people. Those who can remove the emotion step back and look logically at the options will come out of this time ahead, the others will not.