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.
"And that is it. Only idiots would get any other loan, that and extended warrantees."
That is not true. ARMs can actually be much better options than fixed rate mortgages in certain situations. The people who get overextended in an ARM are basically the same type of people who get overextended in a conventional loan.
A No Doc loan means when you are on the floor with your heart attack after receiving the foreclosure papers, they can't call a doc to work on you...(probably because you didn't pay your insurance...) "Sorry sir No Doc..."
I totally disagree with you. These arms will start costing people houses in about 12 to 118 months at a high rate.
Cute.
118 = 18, coffee level low.
Well I did say in certain situations, and there are many types of ARMs. Some ARMs are fixed for as long as five years. I would not want an ARM that wasn't fixed for at least some period of time. If someone bought in 2001 in Las Vegas or MD on a 5-year fixed ARM they would have built up a huge amount of equity due to appreciation. They would have been paying a very low rate, even by the standards of the past 6 years. They could have invested the money they saved with the extra low rates. And they could have just locked in on a 30-year fixed back in November when they rates were close to their recent low points. An ARM is also an excellent choice if you plan on selling before it is time for your rates to be readjusted. I would be a little more weary of ARMs at this point in time, but it is still a good option for some people.
Are you "Fee Only". Fee Based, or Straight Commission for you compensation.
Yes asset allocation and the total picture (including real estate) are often overlooked and even poo-pooed by some investors. Mankowitz, Tobin, and Sharpe all Nobel Laureates gave us modern portfolio theory then ergo Asset Allocation. With brain power like that, those that lend their ear to what they have so say, may in-fact be showing they possess something sometimes lacking these days in our culture; wisdom.
"Mortgage brokers are evil people."
Sounds Howard Deanish.
Anyone who has a vested intrest in getting my money from me is evil as far as I am concerned.;)
I'm waiting too. There's been a slight increase in foreclosures in LA, and I think a significant number of people are on the edge and will need to get out in a couple of years, leading to a glut of single-family homes from people who couldn't really afford them in the first place. They need to dump it, and that's where I come in...
Southern California is goign to bleed red ink. With over 40% of the mortgages being intrest only, ballon, or arms. And like you I figure there are a lot of people just hanging on. Another .5% increase in intrest rates, a slow down in the economy, or just a opps that happens in life, will push a lot over the edge. My wife and I budget at 90% our net income so we can afford lifes opps.
"Anyone who has a vested intrest in getting my money from me is evil as far as I am concerned."
I am not a banker, but have done a lot of business with various of all sizes. Calling bankers evil is a ludicrous statement. The US Banks are largely responsible for our place in the world and the power of our economy. The money banks lend to people and businesses drives the economy. When bankers come after people, they aren't coming after your money. They are coming after their money that you owe because they lent you money. As far as I'm concerned, calling banks evil is a socialist concept.
And nobody needs to get all worked up thinking that I'm calling them a socialist. I'm just saying that banks are a major component of the capitalist system, and criticizing banks is criticizing capitalism.
If you owe the money, it ain't your money.
Everyone loves banks when they are getting the cash, but some people start hating them when it is time to pay the money back.
I represent some clients acquiring an Alabama building with a NNN lease, very strong national credit tenant credit with defense contracts, and a 9.5% cap rate. I am going to own a piece of the building, and it will be free and clear. I will pass on the advice from those brokers.
If they cannot sell the condo, they may be able to exchange it for another property. I've done that for clients in several states for many years. There will be someone, somewhere who wants a condo in Chicago and will exchange either real or personal property for it. There may be a doctor out there who would offer 20K in future medical services in exchange for the equity. Unless the loan is already upside down relative to value, there are ways to get out of the investment. They should also consider a lease-option to give a lessee some incentive. They could take a personal note from someone with good credit as a down payment. With no cash down, the tax benefits to that investor may be worth owning the condo.
No offense, but I can't help feeling that it's a bad sign when attorneys start "half joking".
Or, they own the bank. I have heard about scared mortage companies coming up with 40 year mortages with at the 30 year mark a baloon payment. It ain't over till the fat lady sings and never underestimate the creativity of the printing press operators.
I'm taking note of your advice to have professionals help with investing, which I do, since, while I am not totally ignorant, my personal confidence level is not up to me making such decisions on my own. However, I'm considering changing professionals. Have you any advice on how to select professional investment advisors?
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