How did you get crushed in 2008 due to overleverage ?
Gilbert, AZ · Member since 2020 · 94 posts · 26 votes
How did you get crushed in 2008 due to overleverage ?
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3yQuote from @Francisco Milan:
Hello
I have heard this over and over again from previous investors that lost it all in 2008 and I am starting to hear it right now again. How do these individuats loose everything due to being overleveraged?
Because they are over-leveraged. This means - unlike Bill or Joe - they bought property with 80% - 100% financing and the rent payment barely covered the mortgage, taxes, and insurance. They had nothing left over for other expenses like vacancy, maintenance, or capex. If a property is losing $100 a month and then the property value drops from $200,000 to $160,000 in less than a year, people panic and sell to cut their losses.
Why did some lose?
1. They didn't actually do the hard work and save up. As property values rose in the crazy market, people learned they had a lot of equity in their primary home. They thought they were wealthy and that real estate only goes up, so they cashed out their equity and bought investment property. Now they are leveraged on the investment and on their primary home.
2. They had no idea how to buy smart. They heard that real estate is a great investment, so they bought something without crunching the numbers, researching the location, etc.
3. After buying the property, they failed to learn how to manage it. They get bad tenants that don't pay rent or trash the property, they start bleeding money, and suddenly their golden egg turns out to be a lead weight they can't wait to unload.
Look at the recent market. The market went crazy and prices skyrocketed. A lot of homeowners suddenly realized they had a lot of equity in their primary home. They also saw a video that said they could buy a short-term rental in the Smokies or Florida and make $150,000 a year. Who wouldn't want that??? They cashed out their equity (bringing their mortgage payment higher than they want, but they can swing it with all the profit they'll be making) and they buy something for top dollar in a market they are unfamiliar with during a peak season. Eventually, they will learn that the property nets 1/3 what the YouTube guru told them it would, it's more work than they thought, and the shine will start to wear off.
If the market turns, people in this situation will drop that property for a loss and run with their tail tucked just to stop the bleeding. Tens of thousands of new investors will follow suit.
What could cause that panic? An economic depression. Prices rose astronomically and they could drop quite a ways to more reasonable values. War with China. Another COVID-like farce. There are many unknowns. Wise people flourish while the foolish lose.
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- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
No idea. Rents were going up for me. Properties lost value but provided more and more cashflow. PROBABLY, they are talking about people with either adjustable rate loans or introductory periods with interest only payments where their payments suddenly rose. I only did fixed rate loans.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThese have to be the reasons. The only way any of this would have happened is if for some reason the note was called, or their costs rose to where they no longer had positive CF, needed to sell, but they couldn't cover the remaining loan balance. The above reasons would be reasons why this would happen, but this would be true only if the original deal left them with a very low CF to begin with...or, they just panicked.
Quote from @Bill B.:
No idea. Rents were going up for me. Properties lost value but provided more and more cashflow. PROBABLY, they are talking about people with either adjustable rate loans or introductory periods with interest only payments where their payments suddenly rose. I only did fixed rate loans.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Francisco Milan
Because they were over leveraged.
Several reasons - vacancies rise and your asset is losing money every month. They did not have cash to cover it. We are seeing this already happened and people are scrambling to take lines of credit out against properties but the banks are not lending so they will be forced to sell
2008 had 80/20 loans so there was 100% financing and house prices dropped so people were upside down and just walked away
Job loss- many people lost jobs couldn’t pay their mortgages
Loan maturity - this is biggest risk today in commercial real estate since loans are maturing and many operators will not be able to have the required equity they will need to put into the deal because of interest rates
We also have seen cap rates rise by 1% ovet the past year which on a $1M NOI is a 25% drop in value.
7e investments53 Reviews - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @Francisco Milan:
Hello
I have heard this over and over again from previous investors that lost it all in 2008 and I am starting to hear it right now again. How do these individuats loose everything due to being overleveraged?
Because they are over-leveraged. This means - unlike Bill or Joe - they bought property with 80% - 100% financing and the rent payment barely covered the mortgage, taxes, and insurance. They had nothing left over for other expenses like vacancy, maintenance, or capex. If a property is losing $100 a month and then the property value drops from $200,000 to $160,000 in less than a year, people panic and sell to cut their losses.
Why did some lose?
1. They didn't actually do the hard work and save up. As property values rose in the crazy market, people learned they had a lot of equity in their primary home. They thought they were wealthy and that real estate only goes up, so they cashed out their equity and bought investment property. Now they are leveraged on the investment and on their primary home.
2. They had no idea how to buy smart. They heard that real estate is a great investment, so they bought something without crunching the numbers, researching the location, etc.
3. After buying the property, they failed to learn how to manage it. They get bad tenants that don't pay rent or trash the property, they start bleeding money, and suddenly their golden egg turns out to be a lead weight they can't wait to unload.
Look at the recent market. The market went crazy and prices skyrocketed. A lot of homeowners suddenly realized they had a lot of equity in their primary home. They also saw a video that said they could buy a short-term rental in the Smokies or Florida and make $150,000 a year. Who wouldn't want that??? They cashed out their equity (bringing their mortgage payment higher than they want, but they can swing it with all the profit they'll be making) and they buy something for top dollar in a market they are unfamiliar with during a peak season. Eventually, they will learn that the property nets 1/3 what the YouTube guru told them it would, it's more work than they thought, and the shine will start to wear off.
If the market turns, people in this situation will drop that property for a loss and run with their tail tucked just to stop the bleeding. Tens of thousands of new investors will follow suit.
What could cause that panic? An economic depression. Prices rose astronomically and they could drop quite a ways to more reasonable values. War with China. Another COVID-like farce. There are many unknowns. Wise people flourish while the foolish lose.
The DIY Landlord Book4.7248 Reviews - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Francisco Milan:
Hello
I have heard this over and over again from previous investors that lost it all in 2008 and I am starting to hear it right now again. How do these individuats loose everything due to being overleveraged?
The problem with 2008 is home appreciation is growing faster than money supply rate, that itself is conducive for market crash because there should no nothing in the planet that's growing faster than actual economy/actual money being printed.
in 2023 we dont have that problem, this month we have new low record of mortgage delinquency. If there're people that's in foreclosure today it's simply their own (and their lender ) problem. - 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
People got caught with their pants down. This time around is completely different. Inventory is extremely low and builders have throttled way back since 2008. And lender requirements since 2008 have been very tough with requirements of 20-30% down and good credit and DTI. So now everyone has some skin in the game, and those who have bought within the last few years have a ton of equity which means less foreclosures. Desperate sellers can sell to wholesalers or investors if needed due to built up equity in their properties vs getting foreclosed on. And I don't see demand falling off for home buyers or renters. This tight supply of rentals and homes for sale will last for a decade or more. Or at least until home builders fill the gap of 4-6 million homes short nationwide. That could take a couple decades or more!
- 3yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
We actually did really well during the 2007-2008 crash. In 2005, we started to "get liquid" and made sure if we were levered, that LTV percentage was really low. We switched our focus to purchasing the non-performing loans (particularly commercial for us) out of banks and hedge funds. We would then use our banking experience to get the properties back through a deed in lieu or a foreclosure, we would stabilize the property, and then we would sell it off to a REIT. In about 2014, we moved out of that and more back to traditional lending and real estate investing. In 32 years, I've seen a lot of peaks and valleys. The key is to not get out ahead of your skis. Good luck to you!
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Francisco Milan:
Hello
I have heard this over and over again from previous investors that lost it all in 2008 and I am starting to hear it right now again. How do these individuats loose everything due to being overleveraged?
In my world such a statement is an "Urban Myth". I don't know anyone who "got crushed" from '08'.
I personally made $ hand-over-fist. I was in paradise. I had a fire-hose of deals, average list time to sell a completed flip was measured in hours and days.
I know 1 investor who went deep into the red on several properties but it was all just on paper. He simply held the properties, kept leasing them out, cash-flow grew, and he sold out those properties in '20' clearing 6-figure returns on sales of each.
Everyone I saw going under went under for other reasons, and the market simply removed the breathing room on 1 option. They were bad operators, in 1 way or another and failing was inevitable.
I knew 1 guy who was a window washer, no not owning a window washing co, he himself was just a window washer. He took NINJa loans galore, rented everything, and when the music stopped he just kept on leasing and was making every month what he had yearly before. He was crazy over-leveraged and still made through wonderfully because he didn't sell, just kept leasing.
I saw owner occupants going under. Those who lived their life via the monthly swing of things, with all of 2 weeks reserves. When they lost income, and just sat on unemployment, went under. Those who went and got a 2nd, 3rd job, got by. I never bought a home from a couple who said "we lost our jobs, so we went out and got new ones" nope, never heard that story once ever. It was always "we lost our jobs and just sat waiting for that same job to reappear" or something similar. It was a grand pity-party.
- 3yKonstantin GinzburgPro MemberMember since 2021 · 376 posts · 242 votes
Quote from @Francisco Milan:
Hello
I have heard this over and over again from previous investors that lost it all in 2008 and I am starting to hear it right now again. How do these individuats loose everything due to being overleveraged?
What this essentially means is that a lot of owners purchased a large amounts of properties that required low or no down payments. The focus at the time, was to acquire as many properties as possible and since very little down payment was required, it was easy to scale quickly. The downside to this, is a low down payment also means that the monthly payment is going to be larger. As long as the revenue covered the expenses, this system worked but another problem came from the fact that a lot of these loans had adjustable interest rates. Once these loans reset, the revenues were now lower than the expenses. This led to a sell off of properties and since the sell off came in scale it caused property values to rapidly decrease. Since a lot of these loans had low down payments, the situation was made worse because the sellers had no or limited equity in the property so when the houses were sold, they were forced to take a large loss on the properties. The full story is more complicated but that is a short summary of some of the major factors that caused individuals to get crushed in 2008.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Credit lines absolutely froze. Helocs, credit cards. I had business credit cards where issuers like Advanta were failing so lines froze and balances shot up to penalty pricing rates of 29.9%.
Typical commercial 5/5/20 loans weren't being renewed. With the reg uncertainty in Washington, banks had zero appetite to lend on anything but residential property.
Thankfully none of my commercial loans were subject to being called. Just dumb luck my 5 yr mark didn't fall in '09-'11 on any of them.
By 2012 rates fell immensely and credit became more available. HARP also appeared, helping millions including me.
So if you relied on lines of credit, revolving credit or commercial renewals, you were having a really bad day. I had to write credit card checks to pay property taxes more than once.
The only year worse than 2010 for me was 2011. LOL. All the folks waiting for the recession/ depression to scoop up deals weren't an adult during the GRC.
@Jay Hinrichs saw all this from multiple perspectives.
- Member since 2022 · 1k+ posts · 1k+ votes3y
If anyone got "crushed" it was someone who had no business buying a property. Remember George Bush said "everyone should be able to buy a home". So, we got the "no doc" loan. Anyone breathing that entered a bank got a home loan. I wouldn't call them investors. They were all unqualified. You could time when the crash was coming based on when their initial zero interest (one or two year) ARM was ending.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Look, we are NOT in an '07' market.
I know, saying '08' is about to repeat get's a lot of views, ton's of clicks, and it's 98% people who were just kids or not even born in '08' saying this garbage, clicking on the bait, and buying into the BS.
As a person who was an ADULT in the lead-up AND in real estate, the REALITY is we ALL saw it coming. It was commonly talked about by the vast majority, the ONLY question was exactly when the house of cards would come falling down, and how would it all start, how ugly would it get and for how long. But it happening was OBVIOUS.
First off, supply FAR out paced demand. We had properties galore that were being traded by investors like baseball cards with no tenants being placed because each was focused on flipping it up for $20k in a few months.
On finance side we had NO Doc's, stated income, no income verification, interest only 3/5yr ARM loans happening. It was OBVIOUS that as these things started hitting that reset stuff was going to start imploding. There was burger flippers saying "oh, so, whatever I say I make, uhm, how much do i need to say to get this house i WANT, oh, ok, yeah, I make $150k yr, ok, thanks".
The statements that it's all such a mystery is just IGNORANT. Yes, some CAN accurately project and predict the future, because it's MATH.
Todays market and economy has problems and issues, WITHOUT DOUBT, some serious one's, but it's NOT 2007! This obsession with '08'-2.0 is nauseating.
Lead-up to '08' was sky-high prices being created be FAKE demand from a rampant flipper-market and home builder market fueled by what can't even be called "loose" lending policy because it was about as "loose" as the Grand Canyon, it was a shower of free-$ all one had to do was fog a mirror and lie, hence the term "Liar-Loans". That was it, you want $400k just ask and here say this. Yes, mortgage loan officers were literally handing people scripts of what to say because they were making redonculous-$ with no-controls for it.
Where does anyone see that today? Can you just say "can I have half a million please", fog a mirror and get it?
Prices are up, that is the ONLY similarity with '07', that's it. Well DUH it's almost 20 years past, of course prices go up! How much is a bottle of soda? Are we about to see a "soda-collapse"? How much is a burger and fry's? Socks? Dog Food? Paint? That's INFLATION, not a housing bubble.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Tom Gimer:
Income going to $0 didn't help.
Exactly I dont think many posting here realized that many landlords could not collect rent.. and we know many landlords with any kind of debt if they cant collect rent for a year or more ( like what happened in some markets) those folks cratered.. for some reason many of the BP participants think rents are a guaranteed annuity payment :) - 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Henry T.:
If anyone got "crushed" it was someone who had no business buying a property. Remember George Bush said "everyone should be able to buy a home". So, we got the "no doc" loan. Anyone breathing that entered a bank got a home loan. I wouldn't call them investors. They were all unqualified. You could time when the crash was coming based on when their initial zero interest (one or two year) ARM was ending.
Well Henry that statement is completely false .. there were many investors etc that got crushed who were not unqualified when they took out their debt. Just google OPUS development.. and many many others. Your correct the individual investor who did liars loans was a ticking time bomb. But you also had thousands if not a million stratigic defaults in AZ NV CA OR WA.. people that could pay but chose to walk. - Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes3y
Quote from @Bill B.:
No idea. Rents were going up for me. Properties lost value but provided more and more cashflow. PROBABLY, they are talking about people with either adjustable rate loans or introductory periods with interest only payments where their payments suddenly rose. I only did fixed rate loans.
In some places rents did go down. For example, homeowners putting their houses up for rent rather than sell for a loss. Driving rental prices down.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
I keep hearing that. But I hear it all the time that rents dropped and vacancies skyrocketed in vegas and it's not true, at least not in SFH. So where was it true?
I do have a new idea about a possible “victims” that got crushed. I was reminded of it when I read at least 5 posts today title things like…
How do I assume a loan with no money otu of pocket
Can I assume a loan and get seller financing for the down payment
I only have $5,000, the property is $500k, how do I close on it?
I don't have the EMD how do I buy?
How do I get a POF letter when I don't have any money?
I haven’t done any deals so I’m going to start a syndication.
These kind of people probably existed, in much smaller numbers, back then. And they probably got crushed.
Oh yeah, and the 200 posts about STR arbitrage but I think they will be a new group that gets crushed, not too many back then.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes3y
At present one issue is commercial loans that will have interest rates adjust in the next year or so. Those owners may be forced to sell for a loss/ be foreclosed on.
The residential market is hanging on, with many not selling to hold on to a low rate mortgage. This is helping keep prices up. But what if conditions change? For example, unemployment rising several percent, forcing an increasing number of people to seel their homes into a high interest rate environment? We may only be at the beginning of difficult times.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes3y
Data say it did happen. Vacancies rose in Vegas (and nationwide) during the GFC.
https://www.deptofnumbers.com/rent/nevada/las-vegas/#vacancy_rate
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
That’s the problem. I was there and it didn’t happen to me and mine. It was literally the best time to be a landlord. Before that the best qualified tenants could buy homes for much less than renting. The renters were those who couldn’t buy.
Where did they happen? on the strip? What kind of properties? Apartments? Maybe it only happened with the kind of big companies that report vacancies? It didn't happen with off strip SFH. But they wouldn't know that because they never asked how would they know that a Craigslist or Facebook property had been filled? Maybe they counted them all as vacant forever
I didn’t have a 2 week vacancy in 5 years and rents rose 70-100%. People who lost their homes had zero interest in moving back to an apartment, especially those with families. The kind of person that never moves. Most stayed 5-7 years until they could buy another house.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Eric James:
At present one issue is commercial loans that will have interest rates adjust in the next year or so. Those owners may be forced to sell for a loss/ be foreclosed on.
The residential market is hanging on, with many not selling to hold on to a low rate mortgage. This is helping keep prices up. But what if conditions change? For example, unemployment rising several percent, forcing an increasing number of people to seel their homes into a high interest rate environment? We may only be at the beginning of difficult times.
unemployment data in all sector is showing that the job market is too strong and unemployment is reduced.
please do note that these "so called recession" is not a natural recession, but a "technical recession" created by gov. policy , the real economy itself is just fine , prior to 2020 Fed is already doing QT but then due to covid they printed money too much (not accidentally), now they have burnt the money , but they already announce they would print the money again next year. It's not that complicated.
price would going skyrocket again til 2025 lol
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @James Hamling:
Look, we are NOT in an '07' market. go up! How much is a bottle of soda? Are we about to see a "soda-collapse"? How much is a burger and fry's? Socks? Dog Food? Paint? That's INFLATION, not a housing bubble.
yes, the very reason the Fed *intentionally* create this technical reason is becoz they are aware that the banking system, the employment sector are doing well , and so far it's doing well (as you predicted in Greg's thread back in Nov 2022).
If PACW going bankrupt tomorrow , JPM would buy it. Easy .......it's no longer even the news today.
I can share to you 5 bank that losts the most depositors if needed, their unrealized loss due to HTM is much bigger concern than commercial office space problem. - 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Bill B.:
I keep hearing that. But I hear it all the time that rents dropped and vacancies skyrocketed in vegas and it's not true, at least not in SFH. So where was it true?
I do have a new idea about a possible “victims” that got crushed. I was reminded of it when I read at least 5 posts today title things like…
How do I assume a loan with no money otu of pocket
Can I assume a loan and get seller financing for the down payment
I only have $5,000, the property is $500k, how do I close on it?
I don't have the EMD how do I buy?
How do I get a POF letter when I don't have any money?
I haven’t done any deals so I’m going to start a syndication.
These kind of people probably existed, in much smaller numbers, back then. And they probably got crushed.
Oh yeah, and the 200 posts about STR arbitrage but I think they will be a new group that gets crushed, not too many back then.
We have had discussion on this before where you indicate that you did not see rent declines but I point to average rents in Las Vegas having huge declines from the GR and the state loosing ~186,000 jobs. Previously you indicated it was because of the location of your properties. It may be true that you managed to have great locations and did not see rent declines, but Las Vegas suffered huge rent declines, huge job loses, huge fall of RE prices. If you managed not to have been affected in the Las Vegas market at the GR, it is great but you were not the typical Las Vegas RE investor. Most Las Vegas RE investors at the GR suffered increased vacancy and falling rents. All 3 Las Vegas RE investors that I knew at the GR exited the market at that time. Would they have done fine if they had not? Likely, but they did not want to struggle for a potential future recovery. Statistically Las Vegas RE investors were very impacted by the GR. It was one of the more impacted cities (statistically, not necessarily every RE investor).
- Gilbert, AZ · Member since 2020 · 94 posts · 26 votes3y
Thank you guys for your responses so basically what I am seeing the reason for those landlords that got crushed in 08 was due to some of the following reasons
-Getting NINJA ARM loans
-Low Down Payment Loans
Once unemployement hit tenants could not pay the rent so these landlords that got NINJA high ingerest loans could not get these homes rented out so now landlords had to drop rents and even sell their homesf or a loss or let them go
- Gilbert, AZ · Member since 2020 · 94 posts · 26 votes3y
Quote from @Carlos Ptriawan:
Quote from @Eric James:
At present one issue is commercial loans that will have interest rates adjust in the next year or so. Those owners may be forced to sell for a loss/ be foreclosed on.
The residential market is hanging on, with many not selling to hold on to a low rate mortgage. This is helping keep prices up. But what if conditions change? For example, unemployment rising several percent, forcing an increasing number of people to seel their homes into a high interest rate environment? We may only be at the beginning of difficult times.
unemployment data in all sector is showing that the job market is too strong and unemployment is reduced.
please do note that these "so called recession" is not a natural recession, but a "technical recession" created by gov. policy , the real economy itself is just fine , prior to 2020 Fed is already doing QT but then due to covid they printed money too much (not accidentally), now they have burnt the money , but they already announce they would print the money again next year. It's not that complicated.
price would going skyrocket again til 2025 lol
Do you have data to back what you replied?
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