Real estate horror stories

[sgeeeee]

Since real estate is such a hot topic today, I thought I would offer this up:

http://money.cnn.com/2002/12/02/pf/yourhome/q_housingbusts/

"REAL ESTATE HORROR STORIES

There's never been a national bust but keep an eye on your backyard.

. . .

When you drill down to local markets, instead of steady rises, you may find vertiginous spikes followed by stomach-churching drops. What's more, when busts hit, it can take years -- maybe even a decade -- for individuals who bought at the top of the market to recoup their investment. . ."

This was published over on raddr's pages and is stimulating some discussion over there too. It must be the day to discuss real estate.

http://www.raddr-pages.com/forums/viewforum.php?f=9

 

[cute fuzzy bunny]

That happened here in Excramento. Real estate was hot in the late 80's. As my realtor neighbor said "Everyone was running around with a checkbook in their hands and a pen out".

In 1990 it stopped. Slid almost linearly downhill until 1996 and then linearly back up to where it had been in 1990 by 2000. Its still going up now.

A $400k house in 1990 sold for ~$310 in 1996, was worth $400 in 2000, $480 in 2003, ~525 today.

Its no different from anything else. Buy when everyone else is panic selling and sell when everyone else is panic buying.

 

[gayl]

Yep, I was upside down in housing in the late 80s to early 90s. But I see my home as a roof over my head, not an investment, so it did not effect me.  I would have rented for close to the same amount once taxes are taken into account.

Housing has gone so nuts recently that it wouldn't surprise me if those who are refinancing to roll all short term debts into long term ones (ie: car & vacation notes into home loan) find themselves upside down in the near future.

 

[Whakamole]

I'm hearing ads on the radio plugging mortgages where you don't even pay interest for the first few years.

A friend who lives in a condo got an assessment (siding work), and some people sold because they couldn't afford it.

People have overextended themselves on housing. It's scary.

 

[farmerEd]

...and how about those real estate taxes in some of those crazy markets....just a few weeks ago I heard about a neighbor of my aunt and uncle on Long Island that finally decided to sell their house because the RE taxes were getting to be too much **$27,000** per year...and I bet that wasn't a mansion either....$27K per year means you need to work and earn just about $15/hour, for 5 days a week, 50 weeks per year just to pay the property taxes on the house...YIKES...and I thought mine were bad.

The other horror stories I have seen are related: young couples extending themselves by adding huge additions to a otherwise modest house, and then realizing that they property taxes go up about 200 to 300% because of it, and then your house insurance goes up, as well as your heating and cooling costs....

My sister-in-law had a perfectly nice little house in a desireable neighborhood, and did just that; she didn't need to work before they started the addition; now that it is done, she has gone back to work full-time just to pay for the new overhead they have taken on...crazy.

Thats when you understand while a lot of those new McMansions going up are furnished in early-dorm-room decour.....

 

[unclemick]

1971 - tdy at Grumman(aka Long Island) - worked with an engineer getting a new 'bigger' three bedroom house - 36k and $2600/yr taxes. I had nice apt in Littleton, CO at 150/mo in those days. Taxes were high back then. North shore and Glen Cove were even worse?

 

[Jarhead*]

That happened here in Excramento.  Real estate was hot in the late 80's.  As my realtor neighbor said "Everyone was running around with a checkbook in their hands and a pen out".

In 1990 it stopped.  Slid almost linearly downhill until 1996 and then linearly back up to where it had been in 1990 by 2000.  Its still going up now.

A $400k house in 1990 sold for ~$310 in 1996, was worth $400 in 2000, $480 in 2003, ~525 today.

Its no different from anything else.  Buy when everyone else is panic selling and sell when everyone else is panic buying.

TH: Sounds like timing to me If you going to speculate in rental property, could work for you.
I remember having this discussion with you before re: boom and bust periods in Calif. (Has been going on since I bought first house in 1962, and before that, and we will have more after the current one shakes out.
I personally have never known anybody that was forced to sell if they bought a property that was income and age appropriate. If you are a long range type, as in the stock market, short term should make no difference.
Prop 13, passed in the late 70's. We get very few breaks on taxes in Calif. as you know, but this was a biggee for property owners that planned on staying a while.
Find an area that you really like, and let prop 13 be your friend.
Regards, Jarhead

 

[wabmester]

I personally have never known anybody that was forced to sell if they bought a property that was income and age appropriate.

Oh, I have. In fact, those are the people I like to buy from. Divorces, work-related relocations, and one guy who inherited the property and wanted to sell just to ensure that his evil sister didn't get the place.

This next down cycle should be very interesting. Since banks are making loans with no down payments (I even see lenders requiring 10% down on the first, and then encouraging a second mortgage for the rest), I think we'll be seeing a lot of people simply walking away when they're underwater. And those people will cause prices to dive for the rest of us.

 

[dex]

Below is my guess of what I would earn for the sale of my house outside of Atlanta - apx 2,800 sq ft + basement. Real Estate taxes are $2,800/year.
Est net after tax taxes about
1,900
-800 annual maintance
-600 insurance

$500 net profit per year? -or $3,000. It is better than losing money and about the same as renting if you consider the opportunity cost of renting and investing the cost of the house.

Would you say that except for places on the east and west coast this is closer to what the average house owner realizes from the sale of their house?

2005 Sale Est. Profit/Loss - No mortgage, bought in '99
280,053 Sale Price
(19,604)Agent 7%
(1,400)Closing costs
259,049 Net Sale
(236,900) Cost
22,149 Net Profit
3,691 Avg profit per year - 6 years

 

[Jarhead*]

Oh, I have.   In fact, those are the people I like to buy from.   Divorces, work-related relocations, and one guy who inherited the property and wanted to sell just to ensure that his evil sister didn't get the place.

This next down cycle should be very interesting.   Since banks are making loans with no down payments (I even see lenders requiring 10% down on the first, and then encouraging a second mortgage for the rest), I think we'll be seeing a lot of people simply walking away when they're underwater.   And those people will cause prices to dive for the rest of us.

Wab:
My point in making the statement "I have not known anyone personally", was fact. Of course panic selling goes on. Just as panic buying goes on. I made that statement to keep things in perspective. Like everything else in life, the print press and the medias in general exagerate any condition that we happen to be in at the time. There have been many peaks and valleys in the the past with real estate, as there has been with the stock market.
Would i buy real estate now? Not at my age. For a young person, even at the peak, buying real estate for the right reason, and having the advantage of time in the market place should be o.k. , in my opinion. But probably somewhat clouded from the fact that I have always been an investor, and not a speculator, especially when it comes to the place where you are planning to live for a long time.
In any case, Wab, I am using you as a test case. Did you buy any of the above? I hope so, because my oldest daughter who is just about your age has been a carefree renter in the Sacramento area for the last 10 years. (Independent single type). She called me up out of the blue about 7 mos. ago, and said she had bought a home. The reality of homeownership has caught up with her, and she needs a motivational talk from the "old coach". It really has gone a little crazy. "Ouch"
Take care, Jarhead

 

[wabmester]

Did you buy any of the above?

Jarhead, there are at least three reasons to buy real estate: appreciation, income, and shelter.   As long as you're only interested in the shelter aspect, I agree that price only matters in terms of the size of payments you can afford.

I've convinced myself that this is the year that the hot real estate markets will top out, but I'm almost always early in calling the top, so it's probably a great time to buy  

But you might want to remind her about what happened from 1990-1996 and ask her if she has the stomach for potentially being underwater for most of the decade.

I bought in SoCal in 1989, and it was tough realizing that I just made somebody else rich and that while my monthly payments were a great help to the bank, they weren't doing a thing for my equity stake.   I continued to hold the property even after I moved out of state, and I was able to sell recently for a nice profit, but it was a lot longer-term than I thought I was signing up for.

 

[trumpeting_angel]

I bought at a good price in 1987, and then found my family rather suddenly expanding (I got pregnant and had a stepdaughter move in within a 2-month period!). We wouldn't fit in the old house (unless we wanted to take turns eating at the table). The market had risen considerably, so I took the nice profit and used it as a down payment on a bigger house, bought near the top of the market.

Later I took a job far away and, after commuting for a year or two, decided it wasn't worth it. Housing prices had dropped considerably. We sold at a loss, but still had money from the sale to buy (very carefully, this time) a low-priced, bank-owned house. That has since appreciated like crazy.

Now that my net worth is higher, I would never sell at the bottom of the market. If I want to move, I'll probably rent this house out; I'll certainly rent it out if the price drops too low.

But I look at all these ups and downs philosophically. Of course it would have been nice to get a profit on that second house, or not to have chosen to move at that time. And if the drop in housing prices had been much more severe, we probably would have stayed put, since it wasn't a forced move. But I took my initial investment and brought into each new house a down payment, which bought me a nice place to live. I guess this is what people mean when they say they look at it as a place to live, more than an investment.

Anne

 

[John Galt]

I don't really have a real estate horror story, but I
do have a few "mistakes". In 1979 I took a new job
with about a one hour commute. Interest rates were
very high, so to sell our place quickly, I financed the sale.
Then, I bought a new house on a contract with the builder with a very low down payment. Was only there about a year and a half when I
took a job several hundred miles away and discovered
the house we were in was worth less than I owed.
Oops! What to do? I immediately stopped making the payments. When the builder was sufficiently softened
up, I gave him the house back in return for letting me off
the hook on the contract. Then, I got my new employer
to pay me a sign-on bonus which effectively cancelled
my loss on the house I left. I have lots of stories like
this one which I will save in the interest of brevity

John Galt

 

[Jarhead*]

I bought in SoCal in 1989, and it was tough realizing that I just made somebody else rich and that while my monthly payments were a great help to the bank, they weren't doing a thing for my equity stake.   I continued to hold the property even after I moved out of state, and I was able to sell recently for a nice profit, but it was a lot longer-term than I thought I was signing up for.

Wab: The above was exactly my point. As in the stock market, it is time in the market, not timing the market that usually makes the most sense. If you are young enough to have the time in the market of course.(I have never known anybody that said "I wish I hadn't bought so much real estate 25 years ago".

By the way, when you turned your house into a "rental", you received some nice tax benefits along the way.
Our tax codes in this country have always been pretty kind to real estate investors.
When you mentinoned the 3 reasons to buy real estate, you didn't mention the only reason I was interested in buying rental houses. Tax Benefits!
I bought 5 houses between 1976 and 1982. Some were bought at the peak of the then current peaks and valleys. The only one I bought that would have been profitable to sell in 5 years was the one I bought in 1976. I didn't care, as I was getting what I wanted out of them. My intention was to get the maximum amount of tax benefits while I was in need of them.
When I retired in 1987, moved 600 miles away, and still had the rentals. I sold them off, as soon as current tenants decided to move. Sold between 1989 and last one about 4 years ago.
The IRS had to settle for about .50 on the Dollar when I paid my recapture dues. (Was close to 0 bracket after I retired. They all appreciated very nicely, including the one that I bought in 1979, when the then current crop of "chicken littles" were convinced that real estate was dead in the water.
Sorry for the long post, but I have seen about 5 boom and bust periods, (this one is no different) in my life, and continue to be convinced that if you purchase real estate for the right reasons, and are young enough to be an investor, rather than a speculator, you'll be fine.
The long winded Jarhead

 

[wabmester]

When you mentinoned the 3 reasons to buy real estate,  you didn't mention the only reason I was interested in buying rental houses.  Tax Benefits!

Well, in the situation I outlined, there weren't a lot of tax benefits. You get a great tax break on your primary residence, but I didn't live in that place the last 6 years I owned it. You can deduct your expenses and depreciation while you're renting the place out, but the IRS "recaptures" some of that depreciation deduction when you sell. And you can defer gains with a 1031 exchange, but 1031's can be a pain and you're generally only delaying the taxes (unless you die before they're due).

And then of course is the tax break nobody likes to have -- capital loss carry-forwards

So, yeah, if you can afford to hang on to your house(s) after you move, you don't mind not-so-hot annualized returns, and you've got the temperment to be a landlord, then by all means buy at the top

 

[Nords]

Maybe it's time to rent that classic movie...

... "Pacific Heights".

 

[Jarhead*]

Re: Maybe it's time to rent that classic movie...

... "Pacific Heights".

Nords: A true real estate horror story.
Not on recommended list by Realtors.

 

[John Galt]

Glenngary Glen Ross?

John Galt

 

[Cut-Throat]

Glenngary Glen Ross?

John Galt

That is on my worst movie of all time list! - I went to it thinking good actors - jack Lemon etc. - A boring study of a couple of foul mouthed salesmen confined to a room. - Yuck!

 

[John Galt]

I agree Cut-Throat. Terrible movie! You would think
with all that talent. Still..................there are many other flops which were loaded with good actors.
The only actor I can think of that I enjoyed in every movie (and who saved a few all by himself)
was Pacino. He may have made a "stinker" but if so
I must have missed it.

John Galt

 

[Cut-Throat]

I agree Cut-Throat.  Terrible movie!  You would think
with all that talent.  Still..................there are many other flops which were loaded with good actors.
The only actor I can think of that I enjoyed in every movie (and who saved a few all by himself)
was Pacino.  He may have made a "stinker" but if so
I must have missed it.

John Galt

My all time favorite is Clint Eastwood, never saw a movie he made that I did not enjoy.

MY alll time worst was John Wayne, never saw a movie he made that I liked.

 

[haha]

MY alll time worst was John Wayne, never saw a movie he made that I liked.

What do you think of Red River? I remember seeing that when I was a little boy, with my Dad. I thought it was incredible. The cattle stampede, the scene of fording the river, close to perfect in my book. Howard Hawks directed.

Mikey

 

[John Wayne]

MY alll time worst was John Wayne, never saw a movie he made that I liked.

Well shoot pardner...I havent liked any of YOUR movies none neither.

 

[John Galt]

I only recall walking out of 2 movies. One starred
Demi Moore and the other, Clint Eastwood.

John Galt

 

[Cut-Throat]

I only recall walking out of 2 movies.  One starred
Demi Moore and the other, Clint Eastwood.

John Galt

Now Demi Moore is a Movie I can watch with Plot, No acting, and even no volume