Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Thursday, February 16, 2006

Speculators Get Spanked

(spotted by Ben) Not specific to Sonoma, but let all in the same boat be warned, this is how the story goes....

The Chicago Sun Times has a ‘warning’ for condo speculators. “Q: My husband and I were on a great path to being financially stable. 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 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. 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.”
“Should I start talking to attorneys or debt consolidators? I just want to be pro-active in taking care of this costly mistake.”

“A: “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 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. 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.”

Inman News has a similar tale. “DEAR BOB: A year ago, we bought a house in a new neighborhood one hour away from our current home. We were offered no mortgage payments for six months, but then we had to sell or refinance. When we tried to sell or rent the house, we learned the builder sold all 20 houses to other investors who were doing the same thing.”

“We sold the house for $90,000 less than our purchase price, and will have to come up with $33,000 cash to close the sale. Our monthly payments of $3,000 are way above the rental market of about $1,750 per month, plus a $100 monthly homeowner’s fee. Is there any way out of this nightmare?”

“A: After reading, and re-reading, your e-mail, I can’t figure out why you would buy such a rental house an hour away from your residence under those very unfavorable purchase terms requiring you to sell or refinance within just six months.”

“I don’t understand how the house could lose $90,000 in market value in just six months and why you have to come up with $33,000 cash to close the sale to your buyer. Obviously, you grossly overpaid for the house. The only good news is, because you purchased the house as an investment, you can claim a capital loss tax deduction. Please consult your tax adviser.”


At 2/16/2006 12:17:00 PM , Blogger moonvalley said...

Thanks so much for the great new blog. I've added you to my toolbar, and my husbands adding you to his also. We look forward to seeing all the latest on the insanity that is the place we call home.

At 2/16/2006 12:45:00 PM , Blogger Marinite said...

You don't have to buy a second house to be considered a speculator. Even people who take out an "exotic" loan are speculating in that they are betting on future greater-than-inflation appreciation.

Marin Real Estate Bubble

At 2/16/2006 01:28:00 PM , Blogger Athena said...

Oh I would say that anyone who heeded the urge to rush into the herd is speculating that they made the right decision. We shall see... He who dies with the most debt wins?

At 2/16/2006 01:39:00 PM , Blogger Athena said...

Thank you moonvalley! welcome and I am glad you are here. I am having a battle with the links section currently, but hopefully I will win and will be able to put up more information.

At 2/16/2006 03:02:00 PM , Blogger moonvalley said...

I posted this at housing bubble but it also belongs here..
Just got back from lunch off the Plaza, (Girl and the Fig) there was a table full of Realtors behind us, about 7 of them, anxiously talking up properties. After scarfing up an 800 dollar lunch..(heard them discussing the bill)..they all checked their Blackberries. One sort of pouted and said…”hmm, no messages. I’m kind of getting used to that”

At 2/16/2006 03:30:00 PM , Blogger Marinite said...

Oh, cry me a river already! Those saps have helped to destroy our communities.

Marin Real Estate Bubble

At 2/17/2006 12:04:00 AM , Blogger Athena said...

Moonvalley- thanks for that update. I will be keeping my ears open at Starbucks tomorrow! Will report back any interesting tidbits. I think they must be getting very used to the quiet phones- my email has been overflowing with notifications of new listings. I received 23 emails in the last two days alone- with nice little notes letting me know they are thinking of me. :-D

At 2/17/2006 12:35:00 AM , Blogger moonvalley said...

I'm found over at the Basque Boulangerie for my coffee every morning, I'll be listening too. There are quite a few contractors that hang out over there, most of them have seemed pretty quiet the last month or two.


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