Speculators In 'Frenzy Of Over-Confidence'

This financial advice answers some questions for speculators. "Q: I became a real estate investor last year (probably, too late) buying a small townhouse, which, fortunately, I rented out within a month. The idea was to let the property increase in value and sell it in two or three years. Now I know that plan will not work. How do you see the picture for investors who recently purchased properties?" "A: There are three essential issues you need to address: First, are the rent and the value of tax write-offs sufficient to support the property? If not, can you reasonably continue to carry the loss?" "Second, did you finance with a loan where payments may rise significantly in the next few years? If yes, will you be able to reasonably afford the higher payments? Third, what is happening in your local market? Are the population and job bases growing? Speak with local brokers for details." "If you can carry the property in a market with good fundamentals, then you have to question whether it makes sense to sell now and take a loss." "Q: Two years ago I refinanced my home. The lender appraised the house at $165,000. I did the loan, a two-year ARM, now the ARM 'start' rate has expired. My monthly payment has gone from $1,200 per month to almost $1,600. I went to refinance with the original company that gave me the loan and they said my home was now only worth $150,000 tops. I owe $160,000. The people who made the original said that due to foreclosures in my area property values had dropped in the last two years." "I now rent the property for around $1,250 per month. I would like to sell next spring but will be looking at a $5,000 to $10,000 loss. Any ideas?" "A: Interest rates are now rising thus your monthly cash loss a year from now could be substantially larger. You need to get this problem quickly sorted out." "The fact is the real estate is a commodity. Prices go up and down. In your case both property values fell and interest rates rose at the same time, the worst combination for a short-term investor. Huge numbers of people have invested in real estate with little down and financing that they only expected to hold for a few years. They gambled that if prices rose in those few years they would be able to sell the property, avoid higher loan costs and earn a profit from the sale. Some investors, in a frenzy of over-confidence, never considered what would happen if property values simply remained stable or actually fell." "Ask if your tenants if they would like to buy. If they have no interest, speak with local brokers where the property is located. Also, speak with other lenders, they may have a different view of local values." "By the time you're done with closing costs I suspect your losses will be greater than $10,000. Thus you have a situation where you both cannot keep the home and also cannot afford to sell it." "It may be that it will be necessary to downsize your current lifestyle, get a long-term loan to cover your losses, get a second job or sell off a car or other asset. None of this is easy, but the situation would be worse with a foreclosure and bankruptcy."