Wednesday, November 28, 2007


"Home prices in California could decline by as much as 16 percent, compared to 7 percent nationwide, the report found." This is the latest estimate.

So, let me get this straight. Let's say that I bought a rental in 2001 for $187,000, which I did, and it was worth $405,000 in 2005, which it was because I sold it for that much. However, if I had kept it, it would only be worth $340,000 by the end of the decline. Sorry, folks, but I'm still trying to figure out what the problem is here. As far as I can see, I made a killing either way. Since my profits (or losses) in real estate are never realized until I've sold the property, I don't end up losing anything in the above scenario, except my over-inflated expectations. Right?

Oh, but there are some exceptions to this pretty picture, aren't there? One caveat is for those who bought within two to three years of the start of the decline. That really stinks because, if you are one of those people, then you're stuck. You can't refinance out of an increasing loan--unless you had put a good chunk of money down. You can't sell for what you paid, which would still garner a loss anyway. And you may not be able to keep up with the payments on your adjusted rate.

The other exception is, of course, those of you who refinanced at the height of the market. If you pulled out much of your equity, then you may be sitting on a loan that is valued at more than the house. Not good. If that's the case, then you're stuck in the same way as the scenario above.

Neither one has happened to me--yet. In June, 2008, my 4.75%, 5-year fixed loan will adjust to 2.75% over the One Year Constant Maturity Treasury Rate. If it adjusted today, my rate would be 6.85%. This will cost me $575 more per month. I have been planning my refinance since last June because that's what responsible borrowers do. But I still have not decided the route to take. The one good aspect of this is that my principle has declined dramatically because of the low interest rate of the last five years, so a refinance amount will be considerably less. The bad news is that it's probably going to cost me more no matter what.

As many of you have done, I have spent much time pondering what my next course of action would be if I had a loan that I could no longer afford and if selling my house would result in a short sale. In other words, what would I do if I were stuck?

I guess this did happen to me, in a way, this summer. If you have read all of my posts, you'll know that in August, both incompetent property managers in different states independently decided not to pay my mortgages because they weren't collecting enough rent for all of the expenses. Maybe it's better that it didn't happen to my primary residence (although we were about a day away from skipping our first payment before the apartments sold), but I lost more money from desperately selling off the apartments than I would have by losing my own house. Go figure. However, I did not have to sell for less than I owed on them. That could be a silver lining, I suppose, if we use a very loose definition.

OK, back to the question of what I would do if I were losing my primary residence. Do you really care? Let's pretend that you do. Now, I know that my situation would be different from the average American who is on the verge of losing his/her home. But this is my blog, so I'll have to stick with what is familiar to me.

The assumption is that I have already called the bank and tried to negotiate a lower interest rate or to keep my 5-year rate for a bit longer. Surprisingly, they've said "no." You mean that I have to abide by the loan docs that I signed?!

I think the first option I would look at is renting out my primary residence and living in a small, cheap apartment for a while--yes, even with all seven children, if management would allow. Of course, renting my home would not come close to covering the payment, I'm sure. However, working out the numbers may show that I would have a smaller out of pocket each month until I could refinance or prices went up and I could sell.

My second option would be to determine how long it would take me to sell at a slashed price and how much I would lose. The end result is probably the same--small apartment. Although, I may opt to buy a smaller home with affordable payments. As a real estate investor and business owner, it's a given that I would have to qualify under "stated income." This is not the most desirable rate, so buying a smaller property may not work for us at this point in time.

Option three is to evict one of our tenants and live in the rental. Those payments, especially in the ginormous TX house, are much lower, but both will eventually adjust, also.

Number four is to sell one of the rentals (yeah, like that's possible) and use the money to buy us some time or pay down the loan on a refi.

Frankly, I don't know what I would do. Pray. It hasn't happened to us yet, so I'd better just focus on refinancing before June.