No Money Down? No Equity! You Don't Own Anything!

By
Real Estate Agent with Crye-Leike REALTORS® 165062
I was watching a segment on the Atlanta evening news recently that dealt with a family losing their home to foreclosure.   I guess it was supposed to be a poignant heart wrenching segment, but they lost me when the family returned home from a cruise to find out they were losing their home.  I suddenly was not choked up anymore!  I mean I do not take cruises, nor do I buy real estate with no money down on teaser rates.  What were they thinking?  The scenario for an experienced real estate agent in unimaginable, yet it seemed to happen en-masse! 100% loans?  Think about it!  It is a bad situation that can only get worse!  You don't own anything! 

Since a mortgage is a loan that is used to purchase real estate... what percentage do you own when the entire purchase is financed?  0%!   That's right !  Nada!  A mortgagee usually has an equitable interest secured by the deed, but we go right back to ZERO again!  Sometimes it is compounded by a second trust or home equity line of credit.  The problem is that a lot of folks thought the same thing!  Think about this scenario!  Would you buy a luxury $35000 car on a credit card?  OK, but you would buy a home or the obligation on a 250K home with a 100% loan that you didn't even read the big print!

It is a no win situation with no way out!  The only way it could possible ever work is if prices rose at exponential rates.  That can never happen because that is tied to salaries and income.  When has your salary made you more money than you can handle?  So now, that mistake compounds others! You cannot sell a home for more money just because you owe more on a home.  A home over the long term rises in value, but the rise is not predictable and varies locally and nationally.  The old plan used to be when buying a home is to start small and perhaps trade up.   Starter homes was the perfect place to raise some cash.  Buy low, and sell high!  The larger the down payment for your next home...allowed for a more manageable monthly payment that normally was cheaper than rent.   You could create a nest egg for your retirement, and a shelter for your family.  It all made sense! Buying a home was not about a flip or short term investment. It was for shelter.  The purchase of a home without a plan should not tear a family and a neighborhood apart because there was no plan or thought given to the purchase.  Before buying, decide what your needs are, define your goals, and does it fit your budget?  What about your budget 2 years from now?  Does it fit?  If not, you are impulse buying!

 

Jim Crawford

 

 

 

 

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Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
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Fairbanks, Alaska Realtors ~ Jesse & Kathy Clifton ~  "Personal accountability appears to be absolutely dead."  It is!  It really is hard to begin to find a solution.  I would start by heads rolling in government agencies, but anyone htat worked for the government already knows you can't fire anyone.  Then the poiticians!  Then instead of holding hearings on sports figures, we should have public trials for mortgage fraud.

Feb 26, 2008 01:20 AM #4
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Randy L. Prothero - Hawaii REALTOR®  Yes, it is very hard to get all worked up over these types of situations.  Totally irresponsible.  We are not talking about the person that has gotten cancer, has lost a spouse, or the auto plant closed devastating the local community.  I have sympathy for all of those situations.  The sad thing is how big this is!  This is going to destroy many neighborhoods - vacant homes, vandalism, crack houses etc...

Feb 26, 2008 01:26 AM #5
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Jim Crawford
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Debe Maxwell  There is no other way to describe this other than instant gratification.  The major difference is that when it is done right...you enjoy the later years of your life.  I remember working overtime for a year to purchase my second home.  I had to put down 20% and pay my own closing costs.  When you put nothing down, you are always behind on payments.  So, we limited ourselves to 1 car payment and low mortgage payment.  It is about manageability. 

Feb 26, 2008 01:31 AM #6
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Karen Kruschka
RE/MAX Executives - Woodbridge, VA
- "My Experience Isn't Expensive - It's PRICELESS"
Jim,  They don't need sympathy - they need some serious professional help - they must have known and wanted a "last fling" before they lost their credit cards,  Karen
Feb 26, 2008 01:57 AM #7
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 Karen Kruschka - One of the most experienced agents in Northern Virginia  Sad but very true!  I understand from all my mortgage folks that 100% financing as of today is toast!
Feb 26, 2008 07:49 AM #8
Rainer
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Gayle Balaban
The Best Spot Realty/Waterfront Real Estate/Ooltewah Real E - Chattanooga, TN
E. TN Waterfront Real Estate
During the boom clients acted as if it was an entitlement to buy with 0 down.  They would even get antsy about paying for appraisals and credit reports out of pocket.  Usually it was the baby boomers that got an 89 or 70% loan.
Feb 26, 2008 12:39 PM #9
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Gayle Balaban/Norris Lake Tn. Real Estate  Things have changed a lot.  We recently showed a particular listing that is really great, and all the buyers are really worked up about buying it.  The problem? Loan officers tell me 100% is basically gone!  No offer when we were expecting multiple.  It is still amazing to hear how cocky these buyers are.  A great listing way below market, priced at a fire sale price and they've sent out feelers to come in 30K less plus closing costs etc.  Entitlement. 

Feb 26, 2008 11:44 PM #10
Rainer
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Judy Tuscano
Prudential Verani Realty - Nottingham, NH
NH Real Estate Professional
Jim, It seems so simple to many but there are many out there that have lost their paychecks that never thought they would and have been keeping afloat with their home equity line in hopes that things would turn around. When nothing changed despite their best efforts they find themselves in a boat they can not float. I think the notion that there are people on cruises coming home to foreclosure are a rare exception not the rule. Our middle class is in crisis due to unexpected drastic changes in our economy.
Feb 27, 2008 02:00 AM #11
Anonymous
Roger Hollingsworth

The market here in the UK is lagging yours but we have similar exotic mortgages.

The one I really don't understand is INTEREST ONLY - that's right you only pay the interest and hope capital gains will pay off the loan! (the lenders are supposed to verify you have the means to pay at the end of the term - but anecdotal evidence suggests this has not been rigorous in some cases)

 

Effectively it is RENTING from the bank! 

Feb 27, 2008 03:20 AM #12
Rainmaker
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Renae Bolton
Marketing 4 Realtors - Garfield Heights, OH
I'm your Professional Real Estate Marketing VA!

I think it all comes down to responsibility.  I think I've mentioned before that my sister's car was repossesed.  Well, I had no sympathy for her when that happened because she couldn't afford it when she got it and she knew that.  She couldn't afford the $2,000 down-payment that she paid absolutely no utilities to be able to save up for.  She couldn't afford the $460/month payments.  We told her.  She knew it.  But she got the car anyway.  So, when they took it back for non-payment of the loan, I had no sympathy for her.  My other sister's house was foreclosed on last month.  I had no sympathy for her when that happened because I told her that, with a little budgeting, she would be able to keep up the payments.  But, her daughter HAD to go to this certain private school (that she couldn't afford) even though she lived in a city with a great public school system.  She HAD to take these trips with her Girl Scout Troop 3 or more times per year.  The list went on.  So, when she told me she had to move and that they were taking her house, I just thought, "Oh well."

With our children, we have consistently taught them almost from the beginning that you can't get something for nothing.  If you want it, you're going to have to work for it - contribute something.  It doesn't necessarily mean money either.  Do extra chores around the house. Stuff like that.  But mostly, you put up a certain amount and we'll pay the rest so you can't get IT until you come up with your part.

People who have nothing invested in a home have nothing to loose.  If you didn't have to put out any sweat to get it, you won't put out any sweat to keep it.

~Renae

Feb 27, 2008 03:56 AM #13
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Judy Tuscano, NH Real Estate Professional  Thanks for sharing. That is not the case in Atlanta.  In the last few years over 52% of every loan written in the state was no money down, interest only.    Too many persons that should never have purchased a home did so.  Their car payments, gas prices, inflation, and credit have done them in.  There was little or no planning, they had no cash reserves...and guess what?  They cannot make the payments.  In the best of times 100% financing does not work!  It never has.

Feb 27, 2008 07:37 AM #14
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Roger Hollingsworth I suspect there was no verification of income!  I believe it was out right fraud!  Interest only only can work in a rising market.  Everyone was thinking the same thing.  A lemming attitude...and then they all went over the cliff at the same time.  And you are rgiht, it is no difference to renting back from the bank if you have no equity, except that you have more legal obligations.  Renting would have been much smarter!

Feb 27, 2008 07:40 AM #15
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Renae Bolton ~ Marketing 4 Realtors  Let's all go back to basics.  You want something?  Work for it!  Roll up your sleeves, work overtime or take a second job until you have saved up enough to make it work, and then negotiate the best deal out there!   Then do some sweat equity.  Make your changes a little at a time.  After you are in the home, maintain it, and don't over improve it!  Do you have extra money or refund from taxes?  Prepay your principle down on the mortgage!  Have the goal of paying off the mortgage!  Keep your charge payments cleaned up at the end of the month.  Don't buy anything until you have the money to pay for it.  Society doesn't owe anyone the right to own a home. Some people should just rent!

Feb 27, 2008 07:47 AM #16
Rainmaker
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Pam Graham
All Real Estate Options - Jacksonville, FL
Jacksonville, Clay & St Johns Counties

They should have left the cruise part out if they wanted more sympathy. You hit the nail on the head with your post. Buyers didn't think about the consequences of their actions when they bought homes with no money down or with teaser rates.

Feb 27, 2008 07:54 AM #17
Rainmaker
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Renae Bolton
Marketing 4 Realtors - Garfield Heights, OH
I'm your Professional Real Estate Marketing VA!

I agree wholeheartedly, Jim!  When my husband and I "grew up," right around the time when we were expecting our 2nd child, we realized that our priorities were all screwed up and we needed to get our acts together for our childrens' sakes.  Setting a budget that we could stick to was first and foremost.  Then, it was getting our credit reports cleaned up.  Then, saving for things we wanted.  Our goals are so completely different now that we feel like totally different people.  Our goals are to pay off our car notes, starting with the highest one first, and then start making extra payments to pay down the principle on our mortgage.

As for my sisters, I guess they just haven't "grown up" yet.  You're right - they should just rent.  I've told them that myself a couple of million times in the last few months.

~Renae

Feb 27, 2008 08:10 AM #18
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Pam Graham- Jacksonville Florida Real Estate  Thanks!  I agree they should have left that part out, but perhaps even the reporters recognize the folly in all of this! 
Feb 27, 2008 10:16 AM #19
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Renae Bolton ~ Marketing 4 Realtors   When you think about it  there are a lot of rewards for achieving your goals.  Self esteem, self actualization, accomplishment, a good sense of pride.  It is good to show your children how to approach life.    Just because you want something, is it just good to get it? 

Feb 27, 2008 10:23 AM #20
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Kelsie Compton
Triangle Choice Realty, Inc. - Cary, NC
Cary NC Real Estate

Jim - Great article and great points!  We're constantly bombarded by the media and every form of advertising to live for today and "enjoy the good life" regardless of our financial situation.  Our nation's "charge-card" mentality coupled with low savings rates puts the average household at risk during any economic downturn.  We're starting to see the effects of that now.

 

Feb 28, 2008 11:47 AM #21
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Kelsie Compton, Cary NC Real Estate  I agree.  The other day I was thinking about when we were children a lot of the fables the ant and the grasshopper was meant to show that we had to put something aside for a rainy day!  Today kids are taught about alternative family life, and instant gratification from video games.

Feb 28, 2008 12:05 PM #22
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Bronson Barber  I fully agree.  Years ago I had moved into a new home with a higher mortgage, and shortly after I became sick, and within a few months I was unable to work.  I had equity in the home, that a lot of friends told me to tap into.  I didn't.  I held out as long as I could.  When I really needed it, I had something to fall back on as an absolute last resort.

Feb 28, 2008 12:26 PM #24
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