Inman

Real estate agents prosper during buyer’s market

Warning! Market changes are hazardous to your pocketbook. Are you prepared to cope with an entirely different way of conducting business?

It doesn’t take a rocket scientist to see what is coming in the near future for many red-hot seller’s markets. The San Francisco market has seen a 36 percent increase in inventory in just two months. All over the country, days on market have jumped dramatically. Experts predict a steady increase in interest rates in 2006. With each increase, the number of people who can afford to buy in a given price range decreases. Foreclosures are up on both coasts. With few exceptions, multiple offers have virtually disappeared. All of these signs point to the shift from a red-hot seller’s market to a potentially devastating buyer’s market. What can you do to cope?

1. Get the word out

If the amount of inventory in your area is increasing, the law of supply and demand tells us that prices will soon drop. Contact your sphere of influence and your referral database to let them know about the shift in the market. The conversation sounds like this:

“Our strong seller’s market appears to be ending. The inventory has increased by ___ percent in the last 60 days. If this trend continues, your property value will probably decline. If you believe that you cannot afford to stay in your property for several years while the market goes through an adjustment, now may very well be the best time to obtain the highest possible price for your property. If you would like, I will keep you updated with the latest data so that you can make the best financial decision possible for your family.”

Please note that this is NOT a request for a listing. Instead, it’s about providing the seller with data that supports them to choose their best course of action. If the inventory increase continues in your area and prices do start to decline, keep everyone up-to-date. For people who need to sell, you may be saving them thousands (and in some cases, hundreds of thousands) of dollars. You can also use your print or e-mail marketing program to get the word out as well.

2. Tax time

At tax time, update your sphere and referral database by comparing present values with values from a year ago. If the values have decreased, assist people in obtaining a reduction in their property taxes. You can obtain the forms from your local tax assessor and provide a competitive market analysis using price per square foot to support the tax decrease. Obtaining a decrease may be challenging; however, it really drives home the importance of selling now rather than chasing the market down. It also increases the probability that the people you assist will do business with you in the future. Here’s what to say:

“Due to the increases in inventory, many areas have experienced a reduction in property values. If you would like to determine if you are eligible for a property tax reduction, please call me about obtaining a comparable property tax analysis as well as the necessary forms if you qualify.”

3. Dump interest-only, 40-year, and ARM mortgages.

On a $200,000 loan for 30 years, the payments are $1,199 per month at 6 percent interest. The same loan for 40 years is $1,100 per month. The difference of $99 is $3 a day — the price of a cup of Starbuck’s.

In terms of ARM mortgages, if the owner takes an interest-only or 40-year mortgage, there is virtually no principal reduction. A decline in prices means the seller is stuck in the property with no option to refinance or sell. Most ARM mortgages increase to the market rate when they readjust. For example, a buyer with a $200,000 loan with an initial rate of 4 percent would have a payment of $955 per month. If the loan readjusts to a market rate of 7 percent, the payment will jump to $1,331. By refinancing now and paying an additional $245 per month for a 30-year fixed-rate loan, the owner will pay more money for approximately the first year. After year one, the owner saves money. The longer the owner stays in the property, the greater the savings. More importantly, the owner is building equity that creates a cushion for emergencies. Numerous lenders are offering packages with zero closing costs and fees. The owner’s existing lender may be willing to write a 30-year loan provided the owner has kept payments current. Here’s what to say:

“If you have an adjustable-rate mortgage (ARM), interest rates are predicted to increase in 2006. Please check your mortgage documents to determine when your rate will increase and by how much. If you would like to determine how much this will cost, please visit my Web site at www.YourWebsiteAddress.com and use the mortgage calculator to determine the difference in your payments. While we cannot accurately predict the exact interest rate at the time of the adjustment, 6.5 percent to 7 percent is probably reasonable. If you plan to keep your property for more than three years, you may save thousands of dollars in interest payments by switching to a 30-year fixed-rate loan today. Please contact me if you need assistance with this calculation or if you would like a referral to a mortgage professional.”

Helping your sphere and referral database save money is an excellent strategy to keep your business strong, even in a downturn. Remember, give your clients choices, but don’t make recommendations about what to do — it’s their house and their decision.

What if your market is shifting to a seller’s market? See next week’s column for tips to survive market shifts.

Bernice Ross, co-owner of Realestatecoach.com, has written a new book, “Waging War on Real Estate’s Discounters,” available online. She can be reached at bernice@realestatecoach.com.

***

What’s your opinion? Send your Letter to the Editor to opinion@inman.com.