A Warning for Condo Speculators

Chicago Sun Times ^ | 2/16/2005 | Terry Savage

[MineralMan]

Wow! That sounds like a real scam, and I'll bet the guy clears his own risk, while leaving his "clients" holding the bag. It's too bad so many people are so easily convinced of things.

The Scientology link is also scary. It's good that you're outa there.

[BagelFace]

"What is a No Doc loan"

I believe that is when the transaction is finalized solely by a verbal agreement followed by a firm handshake.

[MineralMan]

Basically, that's it. A No Doc loan is based on your statement of your income and your credit score. Watch yourself on this, and don't get hooked into any fancy loans. If you stick with a fixed rate, long-term loan with a substantial downpayment, you'll be OK, as long as the payments are doable without strain.

However, the interest rate on such a loan will be a bit higher than a traditional 30-year mortgage. You might want to think about just a straight loan where you have to provide the documentation.

[NYFriend]

Thanks. What's considered a "substantial down payment"? I took a home buying class from a broker last year (adult ed. classes are a great deal, it cost me $10). The broker said you need to have about 12% of the purchase price on hand as cash to cover taxes, fees, inspections and down payment. It worked out to be about 5% down, which sounds pretty low.

[TXBSAFH]

FYI, I heard on the news this morning driving in that Washington Mutual was alying off 2500 people from its morgage division.

[walford]

I recall G. Gordon Liddy saying on numerous occassions to never buy real estate w/o a lawyer.

You'll notice that the buyers in this story felt queasy about the 'no-doc' loan scenario, but their 'eagerness' overcame any thoughts of prudence. So they went ahead anyway.

Sometimes our initial instincts are correct.

[Centurion2000]

I heard on the news this morning driving in that Washington Mutual was alying off 2500 people from its morgage division

That's a huge red flag.

[TXBSAFH]

That and the number of repos I have seen in the market is up.

[MineralMan]

Seems like FR had a glitch. I answered this earlier, but the reply didn't post.

These days, who knows what a down payment should be? It has changed so much. The more, the better, though. But, you'll have what you have, I imagine.

I'd put some bucks aside, though, preferably in an account you won't access, due to some sort of penalties. A 5-year CD is good, these days, and the interest will come fairly close to your mortgage rate. The idea is to have a reserve to pay your mortgage in case of a crisis like a lost job or illness. I'd call 6 months of mortgage payments the minimum.

This is going to be your home, long-term, if I understand you correctly. I'd put as much into it up-front as you can and try like crazy to pay it off before you retire. Having no mortgage payment after retirement is really good.

[The King of Elflands Daughter]

Depending on your age and family situation, you might consider not basing the mortgage on both salaries. That way, if you are young and don't have kids yet, you don't have to keep both parents in the work force when there is a baby. It's one of the things that I don't regret doing, but everyone's situation is different.

[MineralMan]

"You'll notice that the buyers in this story felt queasy about the 'no-doc' loan scenario, but their 'eagerness' overcame any thoughts of prudence. So they went ahead anyway.
"

And now they'll pay. Mortgage brokers are evil people. Two years ago, they were all selling cars. Now they're selling paper. They take their commission, and that's all they care about. How the terms of the mortgage affect you is irrelevant to them.

I have not met a single mortgage broker I would have near me. Not one.

[TXBSAFH]

I know a guy who owns 5 rental properties, he has had them for years. He is selling them all.

[Koblenz]

Be responsible for your investments and your loans. We have an interest-only 7 year ARM, 2 years into it. I only make the minimum interest payment each month.

However, I also put another amount, equal to about half my interest payment, into an S&P 500 index fund. It is automatically deducted from my account. I am doing that in lieu of my mortgage principal, as I believe that over time, the S&P will beat the mortgage interest.

Furthermore, the mortgage is less than 50% of the house's current value. It was about 55% of the value when we moved in two years ago, but I figure the house has appreciated somewhat, if nothing else than the fact that it has a new roof and boiler and basement floor and a bunch of other stuff we financed out of pocket to repair / upgrade.

[Dont_Tread_On_Me_888]

I wish I could help you, but for others:

1] Failure to use the advice of professionals often costs "do-it-yourselfers" fortunes. I have been advising against direct real estate investments for about one year now. I was advising FOR real estate related investments in 1999-2004/05 period. There were four mega-waves all happening together that pushed real estate demand higher, and nearly all these factors have run their course and are reversing, slowing or flattening.

2] This couple purchased the second condo for an "investment". Not trying to play Monday-morning quarterback here but the typical Latin America fund (iShares "ILF", for example) was up about 50% last year and over 100% over the last two years. $40,000 invested here would have grown to $80,000 in the last two years, a far different scenario than what the condo deal turned out to be.

The point I am making here re the Latin America fund is not that it would have been wise to mortgage $20,000 to invest in a stock index, but that TRENDS were different--real estate was at a peak and due to come down (or demand come down) for about four major reasons, and by contrast, stocks in general and international (and small cap and mid cap) indexes were doing VERY well and in EARLY stages of an upturn. Real estate is late stage right now.

3] Major investment decisions should be made in concert with a highly qualified investment advisor--with real estate, that is NOT a real estate person, but a true adviser qualified to advise across ALL investment classes.

The "Money Magazine", discount broker, do-it-yourself push, etc. is quite harmful to the typical person. Most investment variables are much more complex than what most people believe.

In my practice, you would not believe the percentage of investors I have advised who have, over the last five years, had most their 401k, IRAs etc. money invested in large cap stocks, even though large cap stocks have trailed badly mid and small and international for better than six years. People think they know what they are doing, but most do not have a clue about all the factors involved in what makes things tick now versus earlier versus projected later.

I can't help this person now, but hope that some future "do-it-yourselfers" that lack sufficient knowledge take warning. Always better to seek sound advice before taking such great risk.

NOTE: All points here are general and used for example purposes and are not to be taken as specific advice for any one individual.

[TXBSAFH]

You are probalbey in good shape, just because you are so upside on the mortgage. But there are people out there who owe 100% or more with intrest only loans because that is what they could afford. If this market goes south as I think it will there will be a lot of people losing their shirts.

[agrarianlady]

Anecdote.

We sold our large house last March. We realized it was not a good long-term investment as the carrying costs would be not worth it over the long term. (the size of the home being the issue, as well as the way it was built).

I went to the lawyer's office to close and he said how good real estate was as an investment. I said I was looking to diversify. He grinned to my real estate agent next to me.

She said later in the car that they had liquidated everything they own, including their 401Ks, to buy a beach house with a no-doc loan.

Oh well.

We are currently renting and hanging onto the cash. There has been a 400% increase in inventory here in the exurbs of Northern VA so we have much more to choose from if we want to buy again. But maybe we'll wait. Somehow I don't feel the urge just yet.

[TXBSAFH]

The only real estate I would invest in now is a home for my family. I think the market is going down soon.

[walford]

"And now they'll pay. Mortgage brokers are evil people. Two years ago, they were all selling cars. Now they're selling paper. They take their commission, and that's all they care about. How the terms of the mortgage affect you is irrelevant to them."

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.

[Onelifetogive]

Not trying to play Monday-morning quarterback here but the typical Latin America fund (iShares "ILF", for example) was up about 50% last year and over 100% over the last two years.

This is a great trick, but as an investment advisor, telling me what will be up 100% over the NEXT TWO YEARS would be significantly more valuable.....

[DCPatriot]

But there are people out there who owe 100% or more with intrest only loans because that is what they could afford. If this market goes south as I think it will there will be a lot of people losing their shirts.

If it's your primary residence you only "lose" if you sell it.

Yes, you lose paper equity, but...it was only paper to begin with.

Condos are still very strong in certain locations.