How to Avoid Celebrity Real Estate Blunders

Fame provides no exemption from foreclosure crisis.

By + More

Though seemingly immune to ordinary tasks, celebrities have not escaped the misery of real estate deals gone bad, proving all socioeconomic strata are subject to the slumping housing market. As thousands of Americans grapple with the subprime loan mess, the higher-than-usual foreclosure rate that goes with it, and a stagnant housing market, celebrities also are feeling the pain of bad real estate decisions. Ed McMahon, after his long career as Johnny Carson's sidekick on the Tonight Show, was facing foreclosure of his estate in Beverly Hills, Calif., on which he owed $644,000 in mortgage payments. McMahon explained the predicament to CNN's Larry King in simple terms: "If you spend more money than you make, you know what happens." But in a strange twist, Donald Trump announced Thursday he will buy the house for an undisclosed price and lease it to McMahon. McMahon had been trying to sell the property for $4.6 million, down from its earlier $7.6 million price.

Even sadder is the situation of the families whose houses were re-done by Extreme Makeover: Home Edition. A couple of homes re-done as a part of the show are now for sale; their owners can't afford to pay the extra taxes assessed because of the improvements and added square footage.

These high-profile homes are just a taste of nationwide housing woes. A report from the online real estate service shows that the rate of foreclosure transactions has increased nearly sevenfold in the past year. In the first quarter, 14.2 percent of transactions nationwide were homes in foreclosure, compared with 2.3 percent from the year-ago quarter. And 1 in 4 homes (26.1 percent) sold in the first quarter was sold at a loss.

The top screw-ups include buying and selling at the wrong time, not remembering to factor in closing fees when setting a price, and assuming that renovations will add to the selling price.

Joe Russo, author of Selling Your House/Condo in This Housing Emergency of 2008: A Guide to Selling Your Home Now, says, "In this market, I would advise any seller to sell at the first opportunity they can." Very simply, the "pool of available buyers" is drying up, Russo warns, "and credit is getting tighter." He expects another two years of depreciation and at least four years before houses begin to appreciate on a large scale.

If the worst has already happened and a seller faces foreclosure, he or she should contact the lender to see about working out a forbearance agreement or other deal to give the borrower additional time to pay, says Zachary Schorr of Los Angeles-based Schorr Law, a commercial real estate litigation firm.

"Banks are not in the business of buying and selling property; they simply want to have their loans repaid with interest," he says. Because of the unusually high number of homes banks have on their hands, they may be "more willing to work with a struggling homeowner" to come up with a deal, Schorr says.

When it comes to selling a house, you should spend sparingly on improvement. "It's not a good time to put major money into renovations," says Rob Harrington, chairman of OptHome, a company that provides consumers with a variety of real estate information. The work often doesn't lead to a higher selling price. "Spend the money on the little things to provide a good curb appeal, but don't remodel the kitchen or bath" in hopes that will increase the final price, he advises. "It just doesn't translate over."

These are some of the biggest celebrity home blunders from the past half-year:

Donald Trump lowers price by $25 million, and sells

Donald Trump's mansion in Palm Beach, Fla., sold for the most ever spent on an estate in the United States. But that was after an equally impressive price cut: Trump lowered the cost from $125 million to $100 million after two years on the market. He sold the house to a Russian billionaire this month. Trump bought the 60,000-square-foot house called the Maison de l'Amitié for $40 million. He assigned one of his Apprentice show's winners to renovate the place, which added to the price.