Category — McMurdie's Real Estate Rules

OVER 1400 REAL ESTATE & MORTGAGE professionals were arrested today.  Bear Sterns hedge fund managers were taken away in handcuffs.  FBI special agents are the guys that carry guns.  They actually arrest people for mortgage and real estate fraud.

I used to remind mortgage agents that when their client (my clients too) sign a deed of  trust there is bold ten point print that points out that not occupying the property on a owner occupant loan, is a felony.  I’ve even had people (not my clients) actually ask me “do we really have to move in?”  Ya.  Otherwise the guys with the guns show up.  And now you know.  They do arrest borrowers.

There are a variety of mortgage scams, but the most common one is the investor who applies for and gets an owner occupied loan, and never intends to move in.  Bye Bye Puddin’ Pie.

McMurdie’s Real Estate Rule No. 26: Don’t be a Puddin’ Pie.  Tell the truth.

DAYS ON THE MARKET is now less than 90 days in most Santa Clara Valley neighborhoods, and although total listings have increased, homes are selling.  Interest rates are low, and likely to rise, particularly fixed rate as the dollar weakens.  Prices have flattened.  It is time for bargain hunters to buy!  Follow McMurdie’s Real Estate Rule No. 12: buy real estate counter cycle, buy at the market low as soon as it goes flat.  This takes courage, and reading your calculator!

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PLANNING FOR DECREPITUDE PART II is where to buy a home after retirement. Yeah, that’s me, I ain’t ‘a leavin’.

The Blockdaughters have said they remember laughing and using the word “decrepit” as pre-teens.  They still like to use “decrepit” because its sounds fun to say.

Blockdaughter II is a Certified Financial Planner, and this post originated with her question “Dad, what is the condition of your estate planning?” I said, “From your standpoint, it is a disaster, the revocable trusts and living wills are out of date, and accounts are not organized nor instructions prepared.” I had to promise to complete “decrepitude planning” or be subject to a family “cabal” which is an illegal gathering of daughters to pass judgment on wayward parents. To avoid this fate I’m completing decrepitude planning. Then I’m posting my progress so everyone can gauge my progress, including Blockdaughters.

Ahh harr! I’ve started the new revocable living trust, with dispositions of property, but more importantly, a simple incompetency clause in the event I fall off the roof (or have a stroke, get Alzheimer’s, or who knows what) with living will and durable power of attorney for health care!

Adult children tend to have disputes along about the time mom passes away, so it is important adult children participate, know and agree to who trustees are, and who makes health care decisions. My policy is each Blockdaughter has a part and responsibilities all children agree to ahead of time.

I also provide instructions about how the trust and living will are to be used. For instance, if I could not admit and sign myself into the hospital, I instruct the trustee of the trust to admit me by signing as Trustee. This avoids personal liability for hospital bills my children could otherwise incur without realizing it. Trustees should know where original copies of trust and living will documents are kept.

Right after retirement people are in the “go-go” having fun stage of life. They make mistakes. Typically the “go-go” stage of retirement lasts only 5-8 years, for men until about 72. Then the “slow-go” stage begins when you’re going; but not often, and much slower. This stage typically starts at 72 and lasts another 5-8 years. It is at this “slow-go” stage you need to worry about slipping and falling at home, or not being able to climb stairs, even a couple, and driving a car. The “no-go” stage of retirement is tough because of chronic illness, or disability. Often the “no-go” stage of retirement lasts 8-15 or more years.

There are excellent retirement community selection books to read.

Since most of us will spend 16+ years in the “go-slow” and “no-go” stages of retirement the smart decision is to:

1) stay in or move to a community near adult children, within say a half hour drive, and

2) the community should have a full array of medical facilities, hospitals and doctors, senior recreation, and transportation facilities not more than a fifteen minute drive away. (Generally this means cities of seventy thousand people or more.)

The basic mistake I’ve seen my friends make is to move to a beautiful retirement area far from doctors, hospitals, transportation and children. Then “dad” has a major disabling illness. Mom drives dad miles and miles for doctor visits. There is no help. Ambulances are not readily available. In-home nursing visits are difficult to arrange. Life revolves around doctor and hospital visits with long drives often of 1-5 hours duration one way. Not good. Mom gets no help. Then mom has an illness. Single adult seniors have similar difficulties.

The first step in retirement planning is choosing a community to buy a home in, or just planning to stay put. I’m holed-up in Santa Clara County.  But some of you will want to move to the perfect place to retire.

Be sure to read Part III, how to stay in your home during prolonged illness or disability.

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DOCTOR HOUSING BUBBLE looks at Client No. 10 and the Crash of 2008 compared to the Crash of 1929. Read this great post by Doctor Housing Bubble. The Spitzer Splatter, Client No. 9, was much more fun for anyone following the news. I agree with the Doctor’s conclusion, but not his analysis. There is a big bad bear recession headed our way.

OMB testified before the Senate Budget Committee broadcast on C-SPAN last week that 50% of the national debt is owed to foreigners; 20% of mortgage backed securities were owned by foreign entities, and over 20% of the state and municipal bond market has been owned by foreigners. As US interest rates are lower, and the dollar declines foreign individuals and entities are fleeing the dollar in favor of gold, commodities, oil futures, the Euro, and local currencies around the word.

For the first time in US history the economic destiny of the US is in the hands of foreign entities and individual making independent economic decisions. If the dollar melts down dramatically inflation will increase because our dollars buy fewer consumer goods made overseas while at the same time the economy is in recession. Asset bubbles will occur as foreigners flee the dollar. The Federal Reserve may have a difficult time keeping enough money in circulation to run the economy, and at the same time keep interest rates down. The recession is likely to be a big bad bear market for real estate and employment. This will add to the real estate wows we have already.

Being a Mountain Man from the Rockys, I’ve seen market Grizz bars a’fore, an’ I kin’ skin Grizz. But I can tell ya it can get ‘citin’ and it ain’t no fun ‘tall.

Follow McMurdie’s Real Estate Rule No. 31: in a recession/depression sell everything you don’t intend to keep; work hard an’ don’t mind a little grit in your teeth; save your cash; don’t borrow money; be charitable to those people who are wiped out, unemployed, have no home, or no money, and when the bottom hits buy all the real estate you can lay your hands on!

I ‘ll let you know when it is time to buy.

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WHAT IS THE NUMBER ONE mistake a seller can make?  It is overpricing the house.

The Silicon Valley Real Estate Blog itemizes some of consequences of overpricing.  There is actually an old real estate phrase for the rather common phenomena of owners overpricing homes in a declining price market.  The phrase is “chasing the market down.”

Owners who chase the market down go through this sequence:

First, owners know their home is the best in the neighborhood, they bought it, so naturally it is the best value.  When picking a listing price in a declining market, they insist on a price 5% or more above comparable recent sales.  Most of the other sellers in the area do the same.  In the current declining market there is about one buyer for every 6 homes on the market.  Five homes will NOT sell,  and only one will will sell.

Second, after 60 days on the market, some bright seller and agent, realizes their home is not going to sell unless the price is reduced.  The price is reduced 10% to 5% below market.  The house sells in a few days.  This is the one home being sold in six.

Third, a few sales occur over four months, and prices are now 5% below what they were when our homeowner put his home on the market 5% over fair market.  Our homeowner now reduces the list price 5%, for example from $720,000 to $684,000.  This is a $36,000 price reduction, and the owner hates it.  But our seller is still 5% over fair market value, as are all the owners just listing their homes, and only one home in every six will sell.

Forth, after six months the owner is absolutely convinced the agents incompetence is the reason the house has not sold.  The owner fires the agent, and lists the house with a different agent who agrees the house is worth $684,000, but to be “safe” the house is listed at $670,000 with the new agent.  In the intervening two months the house has declined in fair value another $16,000, or about 2%, consequently the home is still overpriced and will not sell.  And so the sequence goes, and a year later the fair market value may have declined 20%,  $144,000 in our example, and the same house still has not sold and is now listed at $580,000.  The are over 400 homes in Alum Rock actively listed today that have “chased the market down.”  Really.

McMurdie’s Real Estate Rule No. 324:  in a market declining .5% a month or more, sell only if the property must be sold, and then price the real estate 5% or more under the fair market value to avoid chasing the market price down along with saving interest and other carrying costs.  Get ahead of a declining market if you must sell.

In our example, the owner and agent should have first listed the home instead of at $720,000, at $648,000, or 5% below it $684,000 competitive market value.  The house would have sold within a few days.  The sale would have been one home that sold, and not one of the five homes that didn’t sell.

Today there is 12 months of unsold listings active on the market.  Any inventory over 90 days is a declining market.  Twelve months of inventory is a steeply declining market.  Homes listed today at competitive market will probably decline another 10% in value by the end of 2008.

Normally owners “chase the market down”.  Instead of “losing” 5%, or $36,000 in our example, they’ll loose $144,000, or 20%, and all the carrying costs.  It is a little bit like watching Buffalo stampede over the cliff.  Only a small percentage of Buffalo are smart enough to take the easy way down.

Silicon Valley Real Estate Blog has my full sympathy.