Subprime Crisis Opportunities

The subprime crisis presents unique opportunities for those willing to take advantage of the new real estate landscape emerging from the ashes of the old. There are proven strategies for real estate success in any market condition, and the changing environment brought about by the subprime crisis presents the perfect opportunity to explore them.

We’ll first look at a successful strategy used at the height of the unprecedented seller’s market we experienced in Southern California until the onset of the subprime crisis. Then we’ll look at a strategy for dealing with a depreciating market should the subprime crisis sink its teeth in the Los Angeles Metropolitan Area.

These strategies share the following characteristics:

1. Identifying market conditions
2. Tailoring the strategy to one’s own risk profile
3. Formulating an exit plan for both the best- and worst-case scenarios.

Seller’s / Appreciating Markets

The unprecedented boom market we’ve been experiencing until recently was a fantastic opportunity many savvy homebuyers took advantage of to participate in the American Dream of being a homeowner, and, subsequently, into becoming a real estate investor. Historically low interest rates made owning a home far more affordable, and many buyers used the opportunity to turn homeownership into not only an escape from renting but a bona fide financial investment.

Selling Strategy

For sellers in an appreciating market, the general strategy outlined below will help maximize your sale price:

• Set the asking price to maximize offers. This may mean pricing your home below what you and your real estate agent feel comparable properties would allow. This will position your home as a "bargain" and attract more potential buyers to bid on the property, and, hopefully, bring about a sale price above asking. In less aggressive markets, this may mean pricing the home at what you feel is its true value.
•  Know your bottom line. What’s the lowest offer you would accept for your home? What will you need to use as a down payment for your next property or to retire debt?
• Be aware of your risk profile. Even in an appreciating market, a seller who’s asking for more than the market will bear risks having his home on the MLS for a long time. Buyers and their agents are aware of properties which aren’t selling and, like anything in nature, inertia can take over. The property may develop a reputation for being difficult and see fewer and fewer offers being made over time. Are you willing to take this risk by rejecting an offer that’s $10,000 below your ideal? $5,000 below?

Buying Strategy

The general buying strategy to use in an appreciating market is as follows:

• Make an offer quickly. In boom markets, good properties usually move quickly. Be decisive and act accordingly. Have a pre-approval letter ready. Pre-approval letters show the seller that you’re prepared and serious about doing business. In cases of multiple offers, pre-approval letters can make the difference between having your offer accepted or being a "backup."
• Consider using your home’s equity to finance additional properties. Owning additional properties may be an excellent opportunity to profit from a rapidly appreciating market. Real estate is an excellent long-term investment for many people, so if being a landlord is within your risk tolerance, consider this option strongly.
• Understand your event horizon. Most people will not live in their first property for more than five years. Knowing this, would you like to keep it as a part of your investment portfolio or would you like to sell it outright so as not to worry about landlording? If you know that this property will be part of a larger real estate portfolio, would taking a 30-year mortgage be your best choice?
• Choose a mortgage based on your event horizon. If you know you’ll be leaving or selling the home in five years, would taking an adjustable mortgage instead of a 30-year mortgage be a better choice? Which of your choices fits with your risk tolerance?
• Have a plan if the market suddenly turns against your expectations. If you have an adjustable mortgage, will you be able to make the payments? Will you be able to sell your home at a profit? Loss? Break-even?

One of our clients exemplifies the general strategy to use in a booming market. He began his journey into homeownership in the mid-90s as a 26-year-old with excellent credit but very little money to use as a down payment. Undeterred, we helped him scrape his way into his first property: a 2-bedroom, bank-owned property in the heart of West Hollywood.

In the next four years, using the money he made from the sale of that first property, he was not only able to retire all of his debt, he was able to acquire 3 additional properties with a combined worth of over $1.2 million. He subsequently sold those properties when he sensed the market was about to change and now lives in a $1 million property in the heart of Hollywood.

Buyer’s / Depreciating Markets

Nationwide, it’s now a buyer’s market, but the local real estate market is still holding strong. This has created an interesting phenomenon in the Westside: a Non-Depreciating Buyer’s Market.

In previous downturn cycles in real estate, when market advantage shifted from sellers to buyers, a concommitant depreciation in prices was seen. Buyers facilitated a depreciation in home prices by making low-ball offers. Seller’s did their part by accepting them.

So far in Los Angeles, this hasn’t been the case. Buyers have been leery of making offers below asking. This has created an interesting phenomenon in which instead of seeing a depreciation in prices, we see a lengthening of days on the market. Sellers are supporting this phenomenon by holding to their original asking price. Eventually, a buyer who is comfortable with the asking price submits a suitable offer and the transaction is closed.

Another significant divergence from previous downturns is the fact that usually, higher interest rates accompany a decline in home prices. The scenario presented by the subprime crisis is different: interest rates have been lowered by the Fed to help bolster the real estate market and the American economy, so the normal lowering of prices seen in buyer’s markets has not been seen so far in the Los Angeles buyer’s market.

Will this unusual trend continue? As we mentioned in a previous post in this series, Los Angeles and the Westside have bucked the national trend of depreciation. If the tide should change, what shifts in strategy should buyers and sellers employ?

Selling Strategy

The following tactics can help maximize your sale price, even in a depreciating market:

• Hire a seasoned Realtor ®. Especially in sophisticated, competitive market such as Los Angeles, Beverly Hills, Glendale, and Hollywood, hiring an established professional is the best decision you can make when putting your home on the market. A true professional will be able to market your property far more successfully than you can alone. A Realtor has access to industry-specific information and services that the general public is unaware of. Many buyers will arm themselves with their own Realtor, so why put yourself at a disdvantage by going it alone? As with any professional you hire, make sure the relationship is built on trust and open communication. They’re investing time, money and resources into marketing your property. You’re investing patience, energy, and a commission. Make sure you’re all getting a great return on the investment.
• Have a team me
  ntality. Hiring a realtor means forming a team, and being a part of a team means letting other people do their work. The seller’s function is to make decisions based on the market picture the realtor compiles using his professional resources. If you’ve chosen your agent wisely, respect the information they give you. Keep the flow of communication open and be clear from the very beginning about your expectations in terms of price, mrketing strategy, days on the market, and number of showings.
• Price according to the market. The biggest mistake sellers can make is not recognizing that we’re now in a buyer’s market. Pricing your home using the same market mentality as when you purchased is a costly mistake. Your home will sit on the market, and buyers will easily dismiss a home and look elsewhere, possibly without offering, if your price is too far out of line with reality. Make sure you listen to your real estate agent about what price the market will bear. If you don’t like what you hear, ask other agents (but be cautious of agents who’ll tell you anything just to get your listing). If agents you trust and respect send the same message, act accordingly.
• Stay calm and optimistic. You’ve established a plan with your agent. Stay on course. A mistake many sellers make is wavering from their original purpose. For many it’s because it was never clear or accurate to begin with which is why it’s imperative you establish these expectations in the very beginning of your relationship.
• Expect longer days on the market. This means having the home in open house/ immaculate order longer than in seller’s markets.
• Be willing to look at lower offers. Don’t be insulted by low-priced offers. You can bargain them up.
• Be ready for picky buyers. In depreciating markets, it’s the seller’s responsibility to woo the buyer, not the other way around. Buyers will be pickier than in appreciating markets so adopt the right mindset in dealing with them.
• Offer incentives. That beautiful flat-screen tv you’ve mounted on the living room wall is beautiful. Why not offer it as an incentive?
• Understand and be open to creative financing. If your financial situation doesn’t require a large sum of cash at close, why not entertain creative financing strategies in buyer offers.

Buying Strategy

The general buying strategy to use in an depreciating market is as follows:

• Make a Market-Based Offer. Regardless of asking price, make an offer based on what you and your real estate professional believe is the true value of the property given current local market conditions. Enlist the listing agent’s support in having your offer accepted. Sellers who price their properties above what the market supports are doing themselves, and their listing agents, no favors. Give them a necessary reality check if appropriate. In the end, everyone wins.
• Look for Hidden Gems. In appreciating markets, there can be such a buying frenzy that even poorly maintained properties with poor photographs can be snapped up. In depreciating markets, the typical buyer expects to be catered to by sellers, leaving them open to dismissing hidden gems—properties which may not shine but which will with a little extra TLC. Don’t let this be you!
• Keep a detailed property log. Keep a record of all the properties you see in case you need to go back to one. In a seller’s market, you usually didn’t have the opportunity to research and mull over an offer. In a buyer’s market, having more time can work in your favor, but you still need to stay organized to stay ahead of other savvy buyers. Take pictures and notes of the properties you see, so when you do finally make a decision, you’ll be ready to pounce.
• Use the internet. In a fast-moving appreciating market, listings found on the internet could quickly become outdated. Many buyers didn’t put a lot of of faith in the accuracy of internet listings because of this. Now that extended days on the market are being seen in the marketplace, the information is likely to be more current. Use this medium to your advantage.

Regardless of which way the market progresses, smart home buyers and sellers are prepared to utilize the right strategy to maximize their dollar. These were just a few ideas to help you formulate a strategy for your unique financial situation. We’d be happy to discuss additional ways to help you profit from the Los Angeles Real Estate Market, however the subprime crisis plays out.