Nothing down = Nothing to lose

Real Estate Agent with Wilson Than Real Estate

As we're faced with a seemingly unending supply of foreclosure news and REO listings, I wonder if we're not reminded AGAIN that the "old school" thinking of, say, 20% down does have value.

While visiting some broker opens recently, one of my associates said she was talking to an aquaintance who was ready to "just walk away" from his house because he was upside down in it.  (How many clients who purchased in 2004 to 2006 are now in the same situation?)  She could not believe this person's willingness to abandon a contractual commitment.  "When I grew up, your word was your bond.  Especially on a contract.   You honor it!"

Another friend told me about someone who's ready to let his house go to the bank.  His home, purchased with no money down, has lost about one-third of its value.  Even with 20% down he would have no equity.  But with 20% down, would he have had some "perceived equity" in the property?  Please note, in neither of these instances have the owners been hit with outrageous rate resets.

I play poker.  I played long before it rose to its current level of popularity.  Here comes the obligatory analogy: when first learning to play poker, you find that it is far tougher to lay down a hand when you have money in the pot than when you have no money in the pot.  Even when my poker hand might not be a winner AND I know that fact, if I've already put some money in there, I still perceive that my hand has value.  If you're a fan of Texas Hold'Em, then you may recognize that it's easier to fold a hand before the flop (before any money goes in) than after the flop (when you have had to put money in the pot).

This perception carries over to any investment.  Why else would people hold on to stocks that drop and drop in value?  They've put money in.

I'm not saying that a home in this market is like a losing poker hand or a sinking stock.  And I'm not trying to justify the abandonment of a contractual obligation.  But it is far easier to understand the "walk away" mentality when we consider the presence or lack of actual and perceived equity someone has in a commitment.

Comments (5)

Susan Trombley
Trombley Real Estate - Wake Forest, NC
Broker/Realtor, Raleigh, Cary, Wake Forest, Youngs

Amazing the amount of people that I have talked to and they are afraid to purchase their first home. I say this seems from the media. But it takes all types out there right now. It is not the same as it was in the early 2000.

Jun 26, 2008 05:16 AM
Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions

Hello Howard,

Your analogy is right on track. With 100% financing the borrower has nothing to lose and therefore is more open to walking away. We have seen hundreds of people in our area just walk away from their home because the value has dropped, but in many ways I don't blame them.

Sean Allen

Jun 26, 2008 05:20 AM
COMPASS - Palm Springs, CA
COMPASS Palm Springs - Broker Associate

Howard - I think this all started years ago when credit cards became popular.

The "Buy now, pay later .... and if you can't pay, walk away" mentality.

How many people actually "save" today? I think it's a frighteningly low number.

Jun 26, 2008 12:10 PM
Jeremy Cowin
Jeremy Cowin Appraisals - Altadena, CA

I'm new to this group, (thanks for the invite Stewart), however not to AR!  And I wanted to make a comment.  It is interesting to note that when individuals put 20% down on a home, the chances of foreclosure tend to be less than a fraction of 1%.  And the less money donw the higher your chances of foreclosure and it exponentially greater with every 5% less (I can't find my resource and exact figures so won't post them until I find them!) but it is astonishing!  Sean said it best "the borrower has nothing to lose and therefore is more open to walking away" and summed by Stewart- "Buy now, pay later .... and if you can't pay, walk away"!  It is sad that with bad credit and NO SAVINGS, people could get into a house to begin with.  The irresponsibility of both the BORROWER and the LENDER is equal in my opinion; Borrowers for overextending themselves for whatever their reasons and: lenders for pushing a loan through that is TOO risky!

Just my $0.02!

Jul 01, 2008 11:10 AM
Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

In the lending side of things Howard, it is called having some "Skin" in the deal. The more skin, the less chace of "walking away". Pretty good rational if yuo ask me. Seems like what was old is now new. 1970 lending standards are a good thing for the industry. It will strengthen the base for servicers and lessen the percentage of lose. When that gets back to an acceptable position of leverage for the lenders, the the borrowers that do not have as much will start being able to get back in. However the lessons of this past debale hopefully have taught the lenders to not go so far out ever again.

Good post

Bo Hussung

Your title source

Jul 09, 2008 04:10 PM