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The classic fable of chicken little is about a chicken that is hit over the head with an acorn and becomes convinced that the sky is then falling.  In modern times, the fable has come to represent someone who is mistaken about imminent danger.  So, how about that real estate sky? Is it falling?  Or just a (big) acorn?

I think, if we were chatting, you would agree that at least the media is going with the falling sky theory. They love the sad story (and there are plenty of them), the scary story, the watch out when the next wave of interest only,   option arm loans hit, then you will really see a foreclosure crisis story.  Chicken little seems to be a media darling..and you can't blame them for courting her...who has ever seen a market quite like this one?

If you were to ask an appraiser (I happen to be married to one, so I do not have to ask), he could provide you with his opinion as to how much the sky may be falling per month in a particular county or area.  He may tell you about the impact on values and discuss things like negative time adjustments--the amount appraisers adjust down the sales price of a comparable property to account for the loss in value since the time of the sale.  For example, if a sale occurred in early January and the appraiser is using it as a comp for a property in early March, the appraiser may adjust down the sales price from that January sale by a certain percentage (say 1/2% to 2% of the purchase price) per month to account for declining market values. 

But does Chicken Little have the buyers' ears?  

Not as far as I can see.  Buyers seem to be coming out of the wood work the last few months.  They are educated (Trulia, Realtor.com, etc). They know the market.  And, they are ready to jump on a bargain.  Earlier this week on a well priced town home in the Tustin Ranch area there were 22 offers in after 2 days on the market.  On a foreclosure home in Yorba Linda there were 25 offers in on one weekend.  All of my listings have had multiple offers.  As I see it, Chicken Little's cries are not scaring buyers out of the current real estate market.  

I have also found that first time home buyers are also not listening to our chicken friend.  Several of my clients have said that even if the market continues to drop, they are in for the long run and see the current market with low prices and affordable, 30 year fixed interest rates at or below 5% as a huge bargain compared to what they could have afforded a couple years ago.  Other clients are asking me to check their math as they calculate that with a small down payment,  it can be more beneficial to buy than to rent.  This has not been the case in Orange County for quite some time. The simple math is convincing them to become homeowners.

My thoughts on this poultry fable?  Its the buyers who write the ending to the story.  If would be buyers opt out of the real estate market, Chicken Little could be right.  The sky could fall.  No buyers means prices in this market decline further and faster.  If, however, buyers continue to come out and play, its going to be a fable about a real estate acorn (granted, a big, painful foreclosure, short sale, mortgage meltdown acorn), but an acorn nonetheless.   From what I have seen the last few months, it looks promising.    

In the last 10 years millions of homeowners took out equity lines and second mortgages .  They used these loans to pay for college, spruce up the house, put in a pool or buy a boat.  The market was heading ever higher and few if any gave much thought to how these loans would play out in a foreclosure market like we have today. 

But, its time to think about them. 

In California the original (read--NOT refinanced) loans used to purchase your home are generally nonrecourse loans.  This means the lender does not have recourse--a claim--against you personally for the loan.  In other words, if you can not make the payments, you can walk away from the loan and the bank can only go after the property.  If the home is sold at foreclosure and there is not enough money to pay off all that you owe the bank, the bank can not come after you personally. 

But what about that equity line and what about that second mortgage?  Equity line loans are recourse loans--meaning the bank CAN come after you.  If you can't make the payment, do not assume you can just walk.  Second loans, like equity lines, are typically recourse loans--unless they were used to originally purchase the property. No walking here.

If the loan you have is a recourse loan, a short sale may be an option worth considering.  In a short sale you have the opportunity to negotiate away the recourse debt--so that after all is said and done, you no longer have personal liability for the loan...so you can put back on those boots and walk away.

Some have asked if its better to let the property go to foreclosure.  If there is an equity line involved or a second mortgage that was not part of the original purchase price, the answer may be no.  The equity line lender and second mortgage lender may start collection proceedings for any unsatisfied loan balance after the first lender forecloses. 

Determining the status of your loan (recourse or non-recourse) and the liabililty you may face after foreclosure or short sale requires professional evaluation. Even refinanced, first loans can be recourse loans--though if they are foreclosed up by a non-judicial proceeding (the overwhelmingly popular method in California), then you generally have no further liability for the first loan.  However, you may still be exposed on the equity line and recourse second mortgage.

If you would like to discuss your situation, please do not hesitate to call or email.

-m by email:  johnsonlaw@sbcglobal.net

This article is not for the purpose of giving legal advice.  It is for general, informational purposes only.  If you desire legal advice, please consult a real estate attorney.

A listing price used to mean something.  Generally, it told you what a seller wanted to receive for the sale of the property.  It wasn't set in stone, but it was a good starting point.  The listing price could be bid up a bit or negotiated down depending on the type of market (buyer's market or seller's market), but it was, with rare exception, a meaningful number with some correlation to fair market value.

Listing prices used to convey valuable information.  Appraisers included them in reports to lenders presumably because they gave an indication of where the market might be heading.   They were a sneak peak into the future.  If listing prices were down for similar homes, the market might be declining and if listing prices were higher than the most recent sales, it was one indicator of an increasing or at least stable market.

But then came the animal that rendered the listing price meaningless: the short sale.  The listing price on a short sale may have no correlation to what the seller or the bank will accept for the home.  It often has no correlation to the fair market value and it can not, without due caution and some investigation, be used as an indicator of whether the market is increasing or decreasing.  In a short sale, the listing price can be, and often is, somewhat meaningless.

Why?  Its a result of the system set up by most banks to handle short sales.  Almost all banks will not review or approve a price for a short sale until there is an offer in on the property.  No offer, no approval.  This simple rule drives short sale agents to get offers.  Any offers.  Let me be clear.  I mean ANY offers. Low, high, medium, serious or just throwing a noodle at the wall offer to see if it sticks offers.  Any offer, however absurd, may be enough to get the bank moving.

In search of "any" offer, the short sale agent is tempted to price the listing well below its fair market value.  For serious but unaware buyers, there are risks to this approach.  I have found that buyers who make offers on unrealistically low priced homes are disappointed when they are not accepted by the seller or approved by the bank.  These buyers are many times outbid by more savvy buyers who are aware of the short sale agent's tactics and make a still favorable, but above asking price offer.  If not outbid by savvy buyers, these unaware buyers are shocked when the bank comes back with an approved price that is much closer to the current value of the home. 

For serious buyers (and for agents and appraisers as well), it is important to understand that the listing price doesn't mean what it used to mean.  It just might be a meaningless... and its the short sale that did it. 

If you have any questions, give me a call. (714) 863-5485