I cannot be surprised at the stories in the newspapers about homeowners, investors and even commercial property owners being "Underwater" with today's depressed real estate market values. Many people that own real estate today were just pre-teens when the last deep cycle occurred. Or if they are older, they were not in the real estate market at that previous time.
People come to me every day about short sales and the "bad deal" they got themselves into because the mortgage is greater than the current value - thus they are "underwater". Usually they want some way out since they don't want the negative asset value number on their financial statement. Quite often the income from the property is sufficient to carry the mortgage and other expenses. Sometimes it is not. In either case, the property owner has probably financed the property to get cash out at least once.
Often, after making money perhaps several times on the property, the person now wants to have the bank share in the "loss".
First of all, at least 30% of the time there is no "loss". The cash out money went into fancy cars, a new home or addition, or additional investment property. That person merely "wrung dry" the property of any equity, leaving no flexibility in the value to make up for market fluctuations.
Second, the best choice - especially for income producing property that the property owner hold on. This is only a cycle that happens over history every decade or so (at least in South Florida). As sure as it has gone down it will go up.
My accountant built an office building in the early 1980's and saw his value plummet to 30% below his 75% "safe" mortgage LTV when he built. But the building cash flowed positive and he held on. It was sold this year, 22 years after he built it and 15 years after it hit bottom. Total gain from his original investment? 500+%. This comes out to 22% a year, which is darn good in any market. But that percentage came with years of better gains and bigger losses.
A client came to see me with five rental houses that he wanted to keep for 5 years and then flip. Each house was financed to 100% of the highest value using aggressive mortgage broker techniques (I'm trying to be nice) and with the cash out some of the other houses were purchased, there are the $2,000 suits, the Maseratti, the BMW, the vacations, and to a small extent, the nest egg. The client told me that the properties are nothing but losses to him. I guess he needed a rear view mirror to see where the money went. In fact, the properties did fine. The management of the money was the problem.
This brings us to the short sale. Many of the people I see position themselves, unknowingly or knowingly, for a short sale. It almost is never the bank's fault - but they want the bank to take the loss, while they enjoyed the gains. Right or wrong, if the property has to be sold for less than the mortgage, it can usually be done -- even if the borrower has to cover the short fall with a promissory note or a speader agreement on other real estate the borrower owns that has equity.
The scenarios that come in are each unique - but the underlying reasons can all be categorized. Some are just bad luck because of divorce, health or job related probems. Some are bad (ie not diversified) financial planning. It's almost like someone should do a reality TV show of peoples experiences and how they came out of the problem. Gee! that's a pretty good idea! Fortunately I am not and do not aspire to be a TV producer. But to be on the safe side -- you all know it was MY idea to which I now claim all right!
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers with Short Sales
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