Hi, everyone. Thought I'd share my latest article with you--Cheri *********************************************************************** When the Bubble Bursts by Cheri Merz For the past eight years, I’ve been a real estate professional in Utah, where real estate is contrary to the rest of the country. When everyone else’s prices are up, ours are flat, and vice versa. That phenomenon is creating some interesting activity around here lately. National headlines are screaming about a real estate bubble—and the chances that it’s about to burst. Apparently, this has been the longest price run-up in history. Meanwhile, we are in only the second year of rising prices, after a five-year flat period. Investors are everywhere. This investment market has come about because of questionable lending practices. You see, even when prices are flat, people want new homes. That leads to real estate and lending professionals trying to find ways to oblige. Unfortunately, if the creative financing methods they use aren’t based on sound financial management principles, it backfires sooner or later. Here’s how it happens. Dick and Jane Smith live in a starter home they bought when they got married. It’s tiny, but it served them nicely until the two kids they produced were ready for school. Now they’d like to move to a larger house in a better school district. But, their house isn’t worth much more than they paid for it at 100%. They can’t afford to pay a real estate commission, so they put it on the market for sale by owner, and start looking for their new home. Maybe they build, or maybe they find their dream home. In either case, they write a contract on their new home. But the old one hasn’t sold yet! By the time they have to close on their new home, they have a logistics problem—if they use their small savings for a down payment, they won’t have funds to make two house payments while waiting for their sale. Enter the helpful lender, who suggests they finance their new house with two loans, one for eighty percent of the purchase price and one for twenty percent. This is known as 100% financing, and has been responsible for more people being able to own their homes--and for more foreclosures-- than ever before. The mortgage broker explains that he can get them approved for these loans if they will hire a real estate agent to sell their old home. Eventually, the old home sells. The Smiths only have to bring $5000 to the closing to dump that obligation. They get cash from a credit card (that’s the only resource they have left) to close on the sale. Two or three years later, something happens. Maybe a medical bill, maybe Dick gets laid off from work. Either way, they are no longer able to pay all their bills every month. They miss a payment on the mortgage, because one of the kids needs glasses. Then the car breaks down, so they miss another payment. It seems like a downward spiral, and they keep hoping to catch up… Three months later, they receive a Notice of Default. They now owe three months’ back payments on the first mortgage, plus penalties and interest, plus this month’s payment. The bank wants it all RIGHT NOW, or they will foreclose. Dick and Jane spend a month denying that this is happening to them. They spend another month trying to refinance, but it just isn’t going to work out. Because of the default on their credit record, they can’t get a loan they can afford. In Utah, they now have just over one month to figure it out before the trustee starts publishing a public advertisement for the foreclosure auction. Including their names. (Every state has different laws regarding foreclosure; this is a typical time frame.) You would think they ‘d now make the decision they need to make…sell the house fast and avoid the foreclosure. In real life, here in my area of Utah, that would be possible. Prices are rising very fast. It’s probable that they could list it with an agent and sell it quickly enough to take care of all the problems. Some do just that, and are able to start over without a foreclosure on their record. Others are too paralyzed by indecision, embarrassed to tell all this to a stranger and certainly too embarrassed to tell a friend, or just plain stubborn. Their homes go to auction, sometimes with tens of thousands of dollars in equity. And that’s why the investors are here. To avoid this fate: 1) Avoid financing your home at 100%. If prices fall and you are forced through unforeseen circumstances to sell it quickly, this can lead to financial disaster. 2) Seek the advice of a local real estate professional before you risk owning two houses, unless you have enough in reserve to make both payments comfortably. A real estate professional can give you a realistic assessment of how long it will take to sell your home. If that is longer than a typical escrow period for the purchase of your new home, you have plenty of time after your sale to make your purchase. Don’t get the cart before the horse. (Note that the opposite can also occur, but that’s less of a problem.) 3) If circumstances occur that force you to delay or skip payments on your mortgage, call your lender and explain. Contrary to popular opinion, the bank doesn’t want your house. Chances are that if you have legitimate extenuating circumstances, your lender will work with you. It may cost you a little more money in the long run, but what you save in grief, bad credit record and future interest rates will be worth it. 4) If all else fails and you receive a Notice of Default, first call your lender’s Loss Mitigation department and try again to work things out. Then, call a real estate professional who is experienced in the applicable type of sale. If your area has flat prices, you need an agent experienced in short sale negotiation with lenders. If they are rising, the agent needs to have a track record for quick sales. Here’s good advice for this situation: Stop thinking of this house as your home and start thinking of it as a monster that will eat your credit. You are going to have to leave one way or another. Why not leave with your dignity—and your credit—intact? ============================================================ Cheri Merz is a real estate broker and home-based entrepreneur. Visit Cheri's website http://www.Never2Late4Success.com for more articles, stories and tips on money management, success training and business resources for entrepreneurs. Free newsletter. ============================================================

Hi, Cheri, This gives a very interesting insight into how the American real estate market works. Here, in Spain we have similar situations arising but with the added complication that if there are two houses, they are probably in two different countries and the mortgages will be with two different lenders with two different sets of criteria. It is tragic the way people are so miss led by real estate salespeople here. One of the biggest scandals is that there are still sales made of off plan properties with promises of huge price growth during construction and capital gains to be made on sale before completion (often tax free). I think that the real tragedy is that people are not advised to consider a temporary rental option before loading their bridges to just past breaking point. Sell first and rent for a while to find the best available affordable property. I don't know what it is like in Utah but Spain is a country with a tradition of living in rented accommodation (indeed, the same can be said of most European countries) and there is no shortage for short term occupation. Unfortunately there is not enough commission in this for the real estate salesman so it is seldom suggested and once someone is on the home ownership treadmill, the thought of renting, even for a few months, seems unimaginable. Very sad. Regards

Dear Cheri, Hi, darling, how have you been?? I have been busy, but I had to come read your new article. Excellent advice as usual, and I would expect nothing less from you. :-) I hope business is booming and you are busier than ever. Sincerely,

Great article! My husband has 2 rentals in MN and I feel we're losing on the deal. He doesn''t want to sell because he won't get what he paid....

Art, Thanks for your insight into an area I have no knowledge of whatsoever, i.e., real estate and lending outside the US. Your advice to sell first and rent for a while to find the best property afterwards is sound. However, I can personally relate to the reluctance to do so once you have been a homeowner. Here in Utah, there is very little availability of short-term rentals that are comfortable. The additional thought of putting most or all of one's possessions in storage and essentially moving twice just seems exhausting. We made a quick choice in a purchase after selling our large house four and a half years ago, for that very reason. And have regretted it somewhat ever since. The house we bought isn't suitable for our needs, and we will have to move again before we are settled in what will be our retirement home. I say 'somewhat' because the appreciation has been considerable, so there are some compensations. As for real estate agents who don't give appropriate advice, I guess those exist everywhere. A member of the National Association of Realtors here in the US is bound by a code of ethics; however one must be bound by personal ethics to be truly ethical. There are very few agents who would suggest an interim rental, unless that would be the only way they could get a sale done. Every time I have suggested it, I've been shot down by my clients. Everyone wants to be the one whose convenience is met. Somehow it all works out usually, though. Thanks for your post. Cheri