Have you heard of Scott Mintz? The LA chiropractor bought four houses, leveraging heavily in the expectation that real estate values would rise forever. Shockingly, they didn’t. Now, every one of his houses is underwater.
Mintz not only wants his loans refinanced, he’d like the lenders to reduce his loan principal to reflect their current market value. Of course, this isn’t just about saving Mintz’s bacon. He explains it as a vital move to save the national economy.
I’m sure many Arizona flippers would like to reduce their principal for free as well, considering how many of their properties are now worth 60% of the purchase price. Take a look at some of these listings and you’ll see what I mean.
When I was young, I thought investing in real estate meant first earning money, then buying property. Later, I read Donald Trump’s “The Art of the Deal,” and learned that you didn’t have to have a lot of cash – you could take a risk, and be an artist. A few years after that, everybody wanted to be an artist.
Flash forward to 2009 and a lot of these artists are in big trouble, including Trump himself. They took risks that didn’t work out. And some of these folks are asking for a federal bailout.
Having read the title, you know how I feel about this. I have many major problems with a bailout of this type.
Every penny that has been, or is being spent as part of the myriad bailout programs is coming from the American taxpayer, which means you and me. And if an investor bailout comes from the banks and lenders, in the form of reducing principal on loans… that money will eventually come from the taxpayers as well, because those reductions are not part of a sustainable business model. They will further hurt the banks, which are already in trouble.
It’s unfair because I didn’t do highly leveraged investments of properties that couldn’t possibly be worth their asking prices, unlike the whining whiz kids. Why should I pay for their mistakes?
It’s Fundamentally Unserious
Part of being a grownup is that you have to invest something to get rewarded. For most people, that something is work and education. Work pays and education allows the work to pay more. Flipping and similar methods of real estate investing don’t require that much work and education relative to the potential reward. Admit it, flippers! This is why you did flips in the first place. It seemed like pretty easy money.
But of course, the flippers were investing something – they were investing a huge risk. There was always a chance that a particular flip wouldn’t work out, particularly if significant rehab work was involved. And of course, there was the chance that the overall real estate market would decline.
I have friends on the West Coast of Florida. For years, they made a large part of their annual income by selling the house they had bought the year before. They’d buy a house for $400,000 with $80,000 down, sell it for $600,000, and buy another one for $650,000 with $130,000 down. Their gross income was about $150,000. Now they are sitting on several properties they can’t afford to sell, and can’t rent for anything close to their mortgage payments.
Now people like Scott Mintz don’t want to live with the consequences of the risks they took – they want to socialize them instead. No doubt Mintz would have been happy to share any profits he made with the rest of us as well.
It Takes Away Opportunities for Others
Consider someone who might want to buy a house in Phoenix right now. He couldn’t afford a home for a long time, but now that prices have fallen, he can finally make his move. But his job will get a lot harder if the Phoenix flippers get bailed out. After an investor bailout, many of those homes are no longer for sale, and others have higher prices reflecting reduced inventory.
It Sticks the Government’s Nose Further into Our Business
Government never really gives away money. It uses it to pay for power. Investor bailout funds will come with strings that the recipients will not like – just ask GM and Chrysler.
There are a million things government could do that would strengthen the housing market and make our lives as real estate investors easier. What are the chances that any of those things will be accomplished?