With a dry spell in market transactions forcing many in the real estate industry to tap into rainy day funds, it’s more important than ever to take a long-term view of financial goals while taking immediate steps to preserve cash flow. • For broker-owners, that may mean consolidating offices to cut expenses. For agents, it may mean bartering for the printing of promotional flyers. When it comes to managing debt because of decreased earnings, financial planners say REALTORS® are facing different issues than those who have salaried positions. “Since you don’t have a steady paycheck, I would advise having a year’s expenses in the bank,” says Justin Krane,* CFP®, CIMA®, president of Krane Financial Solutions in Los Angeles. “You may have four deals close in one month, then no deals for 10 months. So you have to have more money saved to bridge the gap between when income comes in, and when the bills are due. ” Krane suggests making a list of monthly expenses, and reducing discretionary spending until things get better. Optional expenses, he notes, are different for each person. “You have to evaluate the investment side of an expense, and whether you’ll get a return for the money,” he says. “If you want to show success by having a nice car to drive clients around in, what else can you cut back on to make those car payments? What other ways can you generate income quickly?” Krane suggests leveraging your professional and social networks by creating affiliate business for yourself. For example, refer clients to an interior designer and get a 10-percent fee off whatever business is generated for the designer. “Think about what you love to do in life in general,” Krane says. “If you do that on the side, or spend an hour a night on it, you could supplement your income. Be creative, and monetize your skills. Everybody has stuff they don’t need. Clean out whatever you have in storage and sell it.” As the economy continues to stagnate, real estate professionals who are in financial distress may be adding to their problems by worrying about an image of failure and postponing hard decisions. “There’s a lot of shame around this right now, and people need to get over [that] because it’ll inhibit them from thinking their way out of the situation,” says Holly Gillian-Kindel, CFP®, CPCC, CLU, director of fi nancial planning for Mosaic Financial Partners, Inc. in San Francisco. “Part of the stigma around this for REALTORS®, particularly if you’re losing your house due to foreclosure, is because this is your business. But you have to lose the shame and let it go because you’re not alone.” Ron Perry, a loan originator for Windsor Capital in San Diego, says his financial troubles began in 2006 when the ripple effect of a market downturn began to hit notaries, escrow and title professionals, and other independent contractors in the real estate business. “My wife was in wholesale lending and I was in retail lending, and it all dried up,” Perry says. “We hung onto our house, but it wiped out close to $30,000 in our 401(k). We had to use credit cards, and then couldn’t pay them when my wife had a car accident. We bought our house in 2002, and Washington Mutual was sympathetic, and lowered our payments in half. “None of our friends who bought in 2004 or later have their homes anymore. Everybody’s been affected by this. I had amassed a collection of vintage BMWs that I had to sell off.” Out of that vintage car collection came the seeds of Perry’s survival, and a new business. Perry, who had restored cars and won trophies at shows, teamed up with another car enthusiast to start Bavarian Werkshop in Huntington Beach, which restores classic BMWs for sale and consignment. “Here I am at 51 years old, wrenching on cars,” Perry says. “I had done commercial, residential, subprime loans, and thought I was covered in every aspect of the business. But what I’m doing now is providing a living until things loosen up again. “I did one loan last year and may get two this year. I keep up on things, and may or may not go back into the mortgage business after the recovery. My wife is just back to work doing loan modifications, and we’re starting to rebuild. The good people in this industry will survive and come back when things recover.” When money is tight, competing needs require hard choices. Following are some scenarios that agents may face, with advice from Krane on how to address each dilemma. College-bound Options This Sacramento agent is a single mother with two children. One is ready to go to college this fall, and her income has been cut in half over the last year. She is barely managing the payments on their home and car. To pay for her son’s college tuition, she’d like to get another loan, but the bank says she doesn’t qualify for a larger line of credit, and she can’t refinance her home loan. Should she tap into retirement funds? “No,” says Krane. “If your retirement is underfunded, you can’t get a loan for that, so you’ve got to keep retirement funds for yourself. Your kid will have to get into a loan program himself and work. “If it’s a matter of living expenses, look at your home equity line of credit. I have a client who’s a single parent and commercial real estate agent who was on the verge of selling her house.She had a $150,000 home equity line of credit. I told her to take $80,000 out of it, which came to monthly payments of $250. That bought her a year’s living expenses.” Short Sale Comes Up Short This Fontana-based agent had counted on closing escrow on a short sale this month, but the property fell into REO status and the asset manager has been missing in action. The agent needs the commission to pay his family’s medical premium of $600 and quarterly life insurance premium of $350. Should he draw on his line of credit, use a credit card, tap his Simplified Employee Plan (SEP), or cash in some mature certificates of deposit(CDs)? “Use the cash that you have with the Cds,” Krane says. “Don’t use your credit card or lines of credit. A fair number of people have had their lines of credit pulled because the value of their property has decreased. You can borrow against the cash value of permanent life insurance, but not term life insurance. Above all, don’t take money out of your retirement.” Time to Tap Social Security? This San Diego agent is 62 and working as a part-time agent. He relies on his commission to pay his mortgage, which is nearly paid off, and the mortgage of a Las Vegas rental property. The rental has not had a tenant in three months. He hasn’t earned a commission in six months. He can’t afford to pay a mortgage on two properties and real estate values in Vegas have tanked. His rental property is upside down. What should the agent do? “Most people in real estate will buy real estate when they get their commissions,” Krane says. “But when their income goes down and they can’t rent their properties, the asset side is down and income is tied to real estate. You’ve got to diversify. “This agent could refinance the house that’s almost paid off, and use that cash to live on. Out of $500,000, for example, he could take $300,000 to pay down the rental property, knowing that at some point, he wants to retire there. He could do the same with a home equity line of credit, or by selling the house. But if he’s upside down in the rental property, it might not be worth doing. At 62, he could get early Social Security, but if he goes back to work before age 66, his benefits will be reduced until he totally retires.” The bottom line, Krane says, is to look down the road, not just at the current situation. “If things stay bad for two years, and you have to dip into your principal in one way or another, that’s not the end of the world,” Krane says. “I would say, look four years ahead, when you start to save again. Ten years down the line, it won’t look this bad. Better times will come in the future. You just have to ride it out.” * Justin Krane, CFP®, CIMA®, president of Krane Financial Solutions, will present on Wed., Oct. 7, “Financial Planning,” a seminar for REALTORS® attending CALIFORNIA REALTOR® EXPO in San Jose.