Posted on 02/16/2006 11:12:27 AM PST by ex-Texan
Q: My husband and I were on a great path to being financially stable. We both started saving for retirement early on, we both have great credit and we have always tried to live within our means and save for a rainy day.
Before we were married, we purchased a condo in the loop. After we were married for a year, we decided to buy a second condo for investment purposes -- and this is where the trouble starts. We used $20,000 that we had saved -- for a rainy day -- and took a second mortgage on our unit for $20,000 to make up our down payment for condo number two. The real estate developer was offering one full year of mortgage, assessments and taxes as an incentive to buy -- not to mention the unit was rented.
We thought this was a win/win situation. We would have two years minimum of no out of pocket costs, and at the end of that period or even before we can put the unit on the market and sell. We figured even if the value only increased by $5,000 it was still a good thing.
When we applied for a mortgage, the lender informed us that our credit score was good enough that they were going to approve us for a no doc loan. I now think this was a red flag for us to realize "this means you really can't afford this loan, but we're going to give it to you anyway."
Well, here we are two years later, and I fear of what is to come. We put the unit on the market in April 2005 with no luck thus far. We first started the price out high, but by the summer we had came down to our exact purchase price.
In November 2005, the tenants' lease was over, so they left. Now we are in the last stage of the two-year period with no out of pocket costs. We are hopeful that we will get a tenant in the spring, but the rent does not cover all of the costs of owning the unit. We pay our current bills no problem, but once we have to start covering the costs of our second condo on our own, there is going to be no way.
I know the bank will want us to blow off our current debt and pay them first. We've worked so hard to keep our credit scores looking A+, and now I'm afraid of what is going to happen.
I know you can't tell us what to do, but can you advise me on how to handle this? Should I start talking to attorneys or debt consolidators? I just want to be pro-active in taking care of this costly mistake.
A: I hope you don't mind that I'm going to print your letter -- with no names, of course -- because for sure you're not the only ones in this situation. About two years ago the speculative condo boom was at its peak. And now many speculators are about to find out that it doesn't take a "crash" or "breaking the bubble" to create your own personal speculative crisis. All it takes is being unable to cover the carrying costs.
Now, I'm going to tell you exactly what I told a woman I know who mentioned she was in the same situation way back last summer. I don't know if she followed my advice, but I told her then and there to reduce the offering price at least 10 percent below what other condos were going for in the same building -- and to tell the realtors that she would offer them an extra incentive if they'd sell it by Labor Day. I told her that at least she'd be the first one out the door -- before the rest of the crowd figured out the situation, and cut their prices too. And when she said she didn't want to cut the price, I reminded her that the carrying costs for an extra six months would be equal to the price cut.
I told her then that I knew I would be writing about this phenomenon in six months -- and now it's starting to happen. So my advice stands. If you can't carry this property, then you have to bite the bullet and list it at such an attractive price that it is the first one that gets sold.
Now, by printing this response I know I'm going to get letters from other people accusing me of starting a "run" on the condo market. So let me forestall that. I don't think I have that power, to suddenly frighten people into selling. I think that the selling wave will happen inevitably because so many people are over-extended in the speculative condo market. If you can get a renter, and carry the difference, fine.
I believe in real estate as a long term investment. But if, as in the case of the people who wrote me in this letter, the carrying costs are too burdensome, it is better to act sooner than later.
And one more thing. They didn't say, but I'm betting that many condo speculators had adjustable rate mortgages, expecting to sell within a couple of years. If interest rates do continue to rise, then the carrying costs could adjust upward even more. It's something to keep in mind.
That's The Savage Truth.
"It's something to keep in mind . . . "
That may be the greatest understatement of all times. Why? Because when those all those Option ARM loans and ARM loans were written with 2.5% (or lower)teaser rates. The loans written about two years ago are going to reset at the current contract rate. Which, in many cases, is higher then the LIBOR rate. [Yada, yada]When the higher rates start to click in, people all over the U.S. will be howling in pain. Then their howls will turn into screams of agony. Because the greater percentage are going to be in the first stages of foreclosure. With the nasty option ARMs, the amount of aggregated and unpaid interest will be added to the total bill. Thousands and thousands of dollars. Together with penalties, late fees, charges, attorney fees, together with other costs. Get ready for a huge fire sale.
I am an attorney in VA/DC and help companies convert from apartments to condos...we were half-joking the other day that if 2000-05 was all about conversion, then 07 will be all about representing the lenders in forclosures...
Soemthing else to consider. My wife and I are thinking about gettign a new house in a few years. I occasionally go online to the local real estate association website once ot twice a month. Just to see what is out there. We would like to move now but want to pay off our student loans first. I did a search for a specific town and size of house. I get 20 to 30 hits and I looked at them online. 2 were obviously repos. There has been a lot more repos in the past few months.
Well, here we are two years later, and I fear of what is to come. We put the unit on the market in April 2005 with no luck thus far. We first started the price out high, but by the summer we had came down to our exact purchase price.
What developers were doing this in 2003-2004? Did they see the market peaking and just want to get out??? First I have heard this early.
The level of foreclosers will be staggering in some parts of this country.
Real estate investments are not for weenies. Good luck to these condo folks. If they're lucky, they'll get to keep the one they're living in.
Our 401(k) meeting had the brokers say that you should not invest in real estate at all at this time. If you want to buy a house, go ahead, but don't "invest". They are dumping all real estate stock ASAP.
There is definitely blood in the water.
Sounds like very good advice to me.
Alot of people will be in this boat in the next two years.
"They are dumping all real estate stock ASAP.
"
Ladies and gentlemen: If you are holding real estate investments other than the home you live in, AND you have any of them financed with any sort of tricky mortgage, GET RID OF THEM INSTANTER!
If the home you live in has an ARM, any sort of interest-only mortgage, or any other sort of mortgage that is not a fixed-rate long term mortgage, try to switch it now...well before the reset date.
Am I an alarmist? In this case, yes.
"What developers were doing this in 2003-2004?"
Two years back from April 05 would be April 03. Interest rates were just hitting bottom then (below 5% for 30 yr conventional). The Chicago market hasn't gone red-hot, but has been appreciating respectably. As a result, I'd have to say that any "inside the loop" condo that had to have such lavish incentives to sell with dirt cheap financing available, nearly three years ago, has to have had more than a few marketability problems then, and still has them now.
"Alot of people will be in this boat in the next two years."
Oh, yes, and worse.
My wife and I are lookign to get a new house in a few years. I will be looking for repos. Truth hurts but, my wife and I live a 90% of our means. We save the rest, for months that get rain if you know what I mean.
"Heard anything about the couple that bought your old house? If I remember right, you mentioned once that they had an unusual mortgage.
"
We exchange emails about once a month. So far, they haven't mentioned anything that they're worried about. It's about two years since they bought the place, though, so they're about to get hit with a reset on their second mortgage that they used for a down payment.
They have lots of close family between them, though, and a lot of that family has some money, so they may be able to float something in the way of a family loan.
They're very happy in the house, which has appreciated since they bought it, although I think the value has flattened at this point.
They're really nice kids, and I'd hate to see them get in trouble with this, but they bought the place. They'll have my sympathy if things get tough, but that's all I can offer them.
We'll probably drive up there on our Spring visit to California to see my parents. We have lots of friends in our old town, so we'll drop in on the kids and have a glass of wine with them. I'm looking forward to seeing all the changes they've made in person instead of in digital photos.
"My wife and I are lookign to get a new house in a few years. I will be looking for repos. "
Well, save up as much as you can, and don't be in a rush. If there's a downside adjustment in your market, you'll find bargains for a while, anyhow.
If you do choose a repo, try to find out who owned the house before and where they're at now. There have been a few bad stories about people moving into repoed houses and having the disgruntled previous owner giving them trouble.
I'm not as up on this as I should be (considering my wife and I are planning to buy a house in Nov. or Dec.). what is a No Doc loan? Is that just a "no income verification" loan?
Our plan is first house/last house, 30 yr. fixed, with between 15 and 20% down. I'm thinking we should be on firmer footing than most, as long as 1) we watch our monthly and 2) both keep our jobs.
I took a job briefly with a real estate developer here in Florida. My job was "IT Manager", but it involved a lot of making powerpoint presentations and updating sales materials that were used in his presentations to potential customers. This guy was using his "Re/Max" franchise name to lend credibility to his claims - he was flat-out promising people that the market was going to continue to be red-hot well into 2010 or beyond, all in an attempt to get them to purchase the condo properties that he is developing.
I knew it was time to get out pretty early, because I didn't want to be a part of that type of operation. I really knew I'd made the right decision when he signed a deal with the "Church" of Scientology to market a condo project they are developing. He brought the Scientology materials to our managers' meeting the next Monday and was encouraging us all to check it out. My reaction - "Buh-bye!"
There will be innumerable people in the next couple of years feeling hoodwinked by this guy. I have no doubt about that. The market simply cannot continue to rise at the rate that it was, and the slowdown is well underway now. Those poor people who were promised that their only cash outlay would be the 10% down payment (sometimes 5%) on a pre-build condo are going to find out the hard way that those condos are not going to be the easy sell that they were led to believe.
I feel so sorry for real estate speculators who will lose huge sums of money...... NOT
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