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The Smart Way to Play a Real Estate Slowdown.

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Author: Willis, Gerri1 real_assets@moneymail.com

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The Smart Way to Play a Real Estate Slowdown

Take the time now to make friends with a local bank. When prices turn, you'll be first in line for bargains.

One of these days, it'll be over. The bloom will be off the boom in housing prices, and a hundred bearish analysts will be saying "Told you so." Don't get me wrong; I'm not forecasting a collapse. In most areas, the worst that will happen is prices will flatten as interest rates rise. (Though prices likely will fall in places where property values have climbed faster than a thermometer in July, especially if local economies turn chilly.) Still, there will come a time when cocktail chatter shifts from the riches in real estate to the risks. If you're serious about investing, you'll recognize that moment for what it is: a chance to snap up good property on the cheap. The time to prepare for that opportunity is now.

One of the smartest ways to get ready is to make friends with a local bank--the smaller the better. I'm talking about one-horse institutions, the kind that haven't been snapped up in megamergers and that still spell bank with a "k," not a "c." The reason? If a slowdown develops and banks start foreclosing, the smaller ones are likely to end up holding title to homes directly. Believe me, landlording is not a business these guys want to be in. They'll sell their foreclosed properties as quickly as possible to a responsible owner. So contact the head of a bank's mortgage lending unit and ask what proportion of mortgage loans are retained by the bank itself. If the answer is more than 55%, you've found a good candidate.

Best friends forever! Just as if you were courting a new client at work, you'll want to let the bank come to trust you. The best way to do that, says Brad Inman, founder of Homegain.com, is to transfer your checking and savings and even retirement accounts there. That gives the bank's execs an insider's view of your finances--a factor that can come in handy down the road. Just make sure to limit the total cash sitting in a single bank to $100,000 per person. That way, if the institution becomes overwhelmed by foreclosures or any other crushing financial problem, your losses will still be covered by the Federal Deposit Insurance Corporation.

Start snooping While you're making yourself an open book to your new bank, make sure to get a read on your real estate market. Begin by phoning the local realtors association or the agent who sold you your current house. The statistic you're looking for from them is "days on market," which simply means the number of days it takes the average home to sell. Ask for the most recent number and what that stat has typically been. When the current days on sale starts to run at least double the norm, you know you're on the right track. Gary Eldred, author of The Beginner's Guide to Real Estate Investing, says be on the lookout for this bright-red flag: local home builders throwing in freebies. If you see a newspaper ad for a free Kenmore with the purchase of a new colonial, it's a sign the market is softening.

The next step is to track properties for sale in neighborhoods you like. Take note of asking prices by checking the Web listings of the brokerages marketing the properties, then get closing prices at your county assessor's office. (Some local governments publish this online.)

If you discover that houses are languishing on the market and prices have stopped climbing or have begun to drop, stop and give yourself a gut check. It's highly unlikely that home prices will permanently fall off a cliff, Pets.com-style. But real estate markets that go down have been known to stay down for years. Ask anyone who owned a home in Texas in the late 1980s, or Southern California in the early 1990s. So don't bid on a property unless you are prepared to be the landlord for at least five years. Because you might have to be.

Now pounce If prices are soft and you're mentally ready to make your move, it's time to cash in on the friendships you've been building at your neighborhood bank. Head to what's called the REO (real estate owned) department and request the foreclosure list for the price range and neighborhood that you're interested in. Your banker isn't allowed to tell you what properties are about to be foreclosed on, but you can reasonably ask whether there are any already in foreclosure that the bank would like to sell. The goal here is to get at the front of the line for any deals--and to ensure yourself a true real estate bargain.

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By Gerri Willis

Gerri Willis is host of CNN's Open House. Write her at real_assets@moneymail.com.

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