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.
"But one is not vulnerable to that sort unless laziness, ignorance and greed are factors on the 'victims' side. This is why charlatans prey upon certain old ladies who are themselves looking to make a quick buck without bothering to do the research or ask too many questions.
My sympathy goes only so far.
"
You're right, to a point. However, I'd estimate that only around 10% of consumers can decipher a loan agreement and really understand what they're getting themselves into.
Yes, a lot of people are only interested in the immediate payments. That's stupid, of course, but there it is.
In my own code of ethics, taking advantage of someone just because you can just isn't right. I'm a full-disclosure kind of guy, which is why I have done all my real estate transactions without agents. I use the title insurance folks, of course, and I do understand documents.
But, when I sold my home in California, I made absolutely certain that the young couple who bought it knew exactly what they were getting. I concealed none of the house's flaws. I even helped them understand the mortgage they were obtaining. In fact, I had three offers for that house at the price I was asking. I actually advise the couple that they were possibly getting in over their heads. They convinced me that they knew what they were doing, so I went ahead with the sale. I liked them.
We celebrated the purchase agreement by my wife and I having the kids over for a nice dinner.
While the house was in escrow, I discovered a flaw I hadn't known about in the house...a problem with the bath surround. It wasn't visible to the average person, and the home inspector missed it. So, I called the couple up and had them come over. I showed them the problem, and said I'd fix it before closing. I let them pick out the new shower surround, and installed it, after replacing some water-damaged underlayment.
Honesty and fair dealing is the only way to do business. The fact that the customer doesn't understand the situation merely means to me that I must help them to understand it. Deception is simply wrong.
You will lose when the priciple starts coming due and you cna not pay for it. I know several people who got arms and intrest only loans for more house then they could afford and are now hurting because intrest rates are going up.
Good for you.
"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."
That happened to one of my tenants in 1992.
My nephew found out who it was, and that he'd gone into the recreational pharmaceuticals business. He paged the guy and left the number of the local narcotics squad. Guy left town, never to return.
It's even scarier buying a repoed car. You can get the "Hey! That's my car!" angry guy coming after you. People are wierd about cars.
People need to learn that if you didn't pay the loan off, it ain't yours.
"People need to learn that if you didn't pay the loan off, it ain't yours."
Lots of things people need to learn, but won't. I wouldn't want my wife to be driving a car and have some ticked-off guy approach her because it used to be his car. I check these things. It's just good sense.
I know who I am. I know who my family and friends are. Strangers, I don't know. I don't automatically trust anyone, especially random strangers. Protecting ourselves and those we care about must be our first job. There are bad folks out there.
It fits. Scientologists are interpersonal fascists.
Funny you would say that - he's from Austria.
Best real estate investment advice I received as a young man was you make your profit when you buy it.
Orlando bottomed in inventory available last April and the supply has surged as of current. Buying a second home/condo as an "investment" today is like buying tech stocks in 1999. In both cases, this is "late stage" buying in an up cycle, or actually at the very peak. Not very smart. Now, stocks are cheap (even more so in late 2002 before the upturn started) and real estate is expensive. Buying high and selling low is not the way to financial wealth.
Good advice from the borrower's perspective, but also remember that each lender has a "loss mitigation" department whose sole purpose is to coordinate workouts to keep a paying borrower in the house as long as possible. A bunch of empty houses doesn't do much for a lender's portfolio.
I never say "what will be up 100%". Never have, never will. I have never promised anybody any type of return in my entire career (that is when dealing with investments subject to risk).
What I DO do is advise on the best strategies based on current trends and projected forcasts, with some taking into account historical patterns.
To me, getting clients into small and mid caps in 2000-2001 and interest rate sensitive issues was a no-brainer. Having a high percent (higher than most others advise) in emerging markets and international was a no-brainer also. This has allowed greater than 100% returns, but I would never promise or assure a 100% gain--I just advise based on sound principles and let the rest do its thing.
Likewise, dumping money into a second home as an "investment" two years ago like this member did was not wise. Some areas have maintained good appreciation in the last two years, but two years ago it was clear that the factors that caused real estate to surge were getting stale and subject to reversal.
The main point I would stress is that most people do not know all the complexities of any investment decision. When 911 occurred, "most" stocks tanked and investors froze. However, few had the insight to gather their thoughts and seek out companies that would PROFIT from 911, e.g., defense stocks, interest sensitive, security, etc. When everybody hears about real estate soaring, many want to jump in and "flip houses" and never spend a second studying the impact of the dollar versus the Euro and what trends are occurring there (very important in real estate in the Orlando area. e.g., since Europeans LOVE Orlando), interest rate trends and projections, supply trends in their local market, materials cost and temporary aberrations (like the 2004 hurricanes and Katrina/Rita in 2005) and how that affects real estate, . . .
People not wise in investing usually take a simple approach and don't have a clue about the complex nature of investing. They also often avoid dealing with professionals thinking they can do it alone. Often, trying to save 50 bucks costs them 50 thousand.
Where I am (Calgary) I see a lot of houses being purchased on morgages that are wayyyy out of whack with the earning potential of the owners. $500,000 homes being owned by people in lower middle class occupations.
Even a cursory discussion with these people tends to reveal that they have little if any financial "give" in their budgets, and that even a temporary disruption in income is going to mean a default situation. Even an increase in the interest rate could very easily drop the boom on some people.
Not a financial wizard or investment banker, but I wouldn't throw a thin dime into real estate at present.
If I can not get it with fixed rate mortgage I will not uy it.
You and I know that...but Jim and Jill over there just want a big house. Today.
Sad, but in a few years my wife and I want a big house, and I will be looking at their repos.
Wise choice. I don't like to get involved in any sort of long term loan arrangement unless I can see what's coming on the horizon.
People who don't know what they are doing should not speculate in real estate. This talk about a market crash is also absurd. The appreciation will just slow down. Foreclosures are up because home ownership is higher than ever, and it has been very easy to get a loan in recent years.
And that is it. Only idiots would get any other loan, that and extended warrantees.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.