Frustration In An Upside Down Real Estate World

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By now everyone understands that the insane run up in real estate prices was fueled by easy credit. Buying a house with little or no money down was child’s play. Every novice investor that entered the market only exacerbated the phenomenon. Even those who weren’t looking for an investment, just a primary residence, got caught up I the frenzy. It was either buy now or rent forever, or so it seemed.

We now realize that this “irrational exuberance” could not last. Like a roller coaster that reaches the top of its climb, it came crashing down with a vengeance. Prices collapsed and refinancing was no longer an option. Left with no equity, there was no reason for someone to hold on to an investment that they didn’t have their own money in anyway. The housing boom led to a foreclosure boom. But what about those who are trying to hang on? Or those who are trying to invest in this mess of a market?

The Seller

Many people are familiar with the term “upside down”, it means owing more on an asset than the value of that asset. It was often heard in relation to automobiles. You would try to trade in a three-year-old car only to find that it was worth less than remaining balance on the loan. Your options would be to make up the difference in cash or to roll the balance into the new loan. Unfortunately that isn’t an option with real estate.

In this case the buyer only has one option other than foreclosure if he must sell. That would be getting the lender to agree to settle the loan for less than the balance owed. That is known as a “short sale.” The main problem here is that the banks aren’t equipped to handle the volume of short sale requests. The process can drag on for months with foreclosure looming ever closer. Many buyers will back out because of the lengthy delays leaving the sellers in a situation that is even worse than before.

The Buyer

Many buyers are unwilling to deal with the headaches of a short sale and choose to look elsewhere. All of the foreclosures have resulted in a tremendous number of opportunities if the buyer has cash or the ability to obtain financing. But what about the investors who don’t have access to capital? They will pursue deals involving seller financing or try to acquire the property “subject to” the existing financing. There are huge problems here as well.

If the seller is upside down, there is no equity. If there is no equity, there is no deal without a short sale. When hunting for a deal a buyer may find a property that the seller has owned for a long time and thinks that a deal may be possible. The buyer then learns that the seller refinanced and pulled out cash at the height of the market and there is no equity.  Frustrated once again.

Perseverance

As frustrating as things are, this too will pass. Eventually some sense of normalcy will return to the markets. We all have to adjust to a new set of rules and learn to adapt to ways of doing business. All we can do is hang in there and keep trying.

Patience and perseverance have a magical affect before which difficulties disappear and obstacles vanish.John Quincy Adams

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5 Comments

  1. Many buyers are unwilling to deal with the headaches of a short sale and choose to look elsewhere. All of the foreclosures have resulted in a tremendous number of opportunities if the buyer has cash or the ability to obtain financing. But what about the investors who don’t have access to capital? They will pursue deals involving seller financing or try to acquire the property “subject to” the existing financing. There are huge problems here as well.

  2. Amazed at the lack of criminal charges or even what seems to be empathy for banks on this blog. Don’t you understand that their greedy, dishonest, unlawful practices just caused a financial crash worldwide. Not yours, not mine, not Juan or
    Pedro whom put their hard earned life savings down only to lose it Have you ever sold a car to someone because you know it is about to need costly repairs? Crook! Thief! dishonest bastard. You are the ones thinking the banks do not have blame & should not be punished. Don’t you know the individuals most responsible for this debacle have profitted beyond your wilsdest imagination by way of your tax dollars. Did you not blame the banks for the run up in prices by opening the flood gates to anyone. Do you really blame the public on not being financial wizards & trusting the banks with their life savings. Our failure as a financial leader in the world is owed to greed & power driven government & to big to fail banks / crooks that stole our past & future wealth & you idiots blame the public. What a bunch of stupid sheep. This country is screwed because of this mentality of acceptable dishonesty amongst the powerful & Rich. Oh, yea, our wonderful leader just gave 35 million to a solar panel company that looses as much money as the goverment does. The company had contributed to his campaign. Thats okay. Oh wait, GE almighty paid less taxes for last year than you thanks to our leader that had the rules changed for GE’s benefit. But thats okay too, because GE hired 3 x-congressmen that new the ropes & contributed to the right people. All this in a week. I know you all (on this blog) think this is just fine.

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