Surviving the real estate bust

With California expected to see an average of 4-5% decline in value each of the next 2 years many are asking what the best method is to preserve their investment. If you were lucky enough to make your purchase prior to 2004 then you likely have seen enough appreciation to absorb the pull back. What should we do during this period?

1) Lower your expectations: Many buyers have purchased homes with the grandeur of making double digit returns in 1 - 2 years. Some are the “Fix and Flip” type who expect to hold the property 6 months or less. Others expect to be able to refinance?their 100% purchase?in 2004 (usually?consisting of a first and a second mortgage)?into?one 80% loan in this same short 1 - 2 year period. This is now not the case and these buyers will need to be prepared to lower their expectations. This means you may need to refinance both your first and second mortgage if rates are an issue or you are in an adjustable (which is the large majority).

2) Negotiate a good deal: Whether you are shopping for a loan or buying/selling real estate you should know what is negotiable and learn to identify ways to use these to your advantage. It is common in current market conditions for sellers to contribute towards closing costs if negotiated for. Also, in a sellers market items are overlooked that leave room for price reductions?in a buyers market?(ie: landscape, paint, carpet etc).

3) Stay away from negative amortization: Whether you are purchasing or refinancing this is a dangerous time to use any loan with negative amortization except in low loan-value investment property purposes. If the only payment you can afford is the negative amortization payment you can not afford the property…it’s as simple as that.

4) Watch the interest rates: You should always know what type of loan you have, when it comes due or becomes adjustable, the interest rate etc. Keep an eye on rates and be aware of what rate would provide an opportunity for a refinance and a lowering of your monthly debt.

5) Protect your equity: Be very careful not to take on too much debt at times when the real estate market is in a slump. While the vast consumer spending?has kept the economy in reasonable shape it can put individual homeowners in a pickle if they need to consolidate that debt and there is not enough equity to get it done.?

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