The Real Estate Hall of Shame - How Not To Use Equity In Your Home

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Real Estate Agent with Tierra Antigua Realty - Downtown AZDRE# SA582422000

The Real Estate Hall of Shame - not sure if anyone has built one yet, but I found a property today that could qualify as a good place to house the "How Not To Use Equity In Your Home" exhibit.  I think it used to be Homer Simpson's place.  He lost it to foreclosure.

Lets take a peek behind the scenes and see how this property might qualify for Poster Child status on the Real Estate Hall of Shame:

Lets see...Homer bought it in 2001 for a little under $300,000. Bear Stearns got it for $465k last fall.  Don't see any problems so far - probably a typical foreclosure on a note gone bad, purchased by the investment bank for pennies on the dollar.

Sales History of Property

This doesn't look so bad - what qualifies it for the Hall of Shame?  Lets take a look at the loan history:

Loan History of Property X

Okay...lets see:  the buyer put down a little less than $15k - which works out to roughly 5% down back in 2001.  No problem yet...less than 2 years later, the owners refinanced for about $20,000 more.  Could have needed to pay somebody's tuition or something.

But wait - look at what happened in 2006!  (Gee, isn't that when the market was going gangbusters & everyone was going to get rich quick?)  After only 3 years, the owners refinanced AGAIN, but for 231% what it previously was worth!

Kind of strange how we dismiss claims of investments that promise amazing returns or "long-lost gold mines" as foolish or the stuff of legend, not reality...but not when it comes to our HOMES.  

"Lets get all of the equity out of our home, we're GETTING RICH QUICK," Homer Simpson says to Marge, "they might change their minds!"

But WAIT...another year passes and lo & behold...the value has gone up ANOTHER 25%! 

"We sure could use another $160,000 - now I can get that boat I always wanted & Marge can have that fur coat to wear when the temperature drops below 80 degrees...and I can show up to my high-school reunion in a shiny new Benz with spinners on the wheels!" -OR- "This real estate thing is a SURE-THING! It will NEVER GO DOWN...lets buy 3 or 4 other homes to MAKE MORE MONEY ON...we'll be ON EASY STREET!"

Homer refinances again in 2007, again pulling out all of the paper "equity" in the home - probably with an interest-only loan that adjusts after 3 years (which was the only way they could afford the payments on their $800,000 home that only cost $280,000 such a short time ago.

For some crazy reason, the lenders want Homer to pay the money back, and the home isn't magically going up in value anymore.  The payments now start to include principal AND interest.  Can't refinance again because the property isn't worth what it used to be.  Time to sell the home!

Property X Doesn't Sell

But the market is going d-o-w-n.  It doesn't sell at the price Homer & Marge need to get out of their debt.  It forecloses.  Homer isn't rich anymore and Marge has to sell her huge hair to rent an apartment.  Easy Street has potholes that could swallow an ark because the City was counting on the revenue from all of these wonderful property taxes to fill the coffers that it depleted on consultants and studies to tell them how to spend all of that money that should be coming in.

It wasn't just Homer - Moe did the same thing with his bar Marge's sister Patty bought 3 duplexes and a new 3500 square foot home because she was jealous.  Otto the school bus driver got a loan to buy 20 acres with a bitchin' manufactured on it so he could turn his stereo up as loud as he wanted.  Ned Flanders put Todd & Rod's names on loan applications and is now being investigated for mortgage fraud.

This didn't just happen in Springfield, or Tucson.  It happened everywhere that values on paper rose extremely quickly.  Apu still has the home he bought in 2002, and is easily making the payments.  He just bought 3 more Quickee Marts at bargain prices, and is thinking of getting a bigger home since prices and interest rates are super-low.  Principal Skinner & Groundskeeper Willie have been buying foreclosures, fixing them up and making a modest profit renting them out (which proves even a numbskull like Skinner can make smart decision if he doesn't get greedy).

Springfield is slowly coming back to normal (as is Tucson).  Some people are at different addresses than before, some the same, but a sobering reality has set in & a lesson learned:  "If it seems too good to be true, it probably is."

Did Homer learn anything?  Probably not.  He's trying to get all of his friends and family to come to a party to celebrate becoming an owner of a business that will soon make him money while he sleeps.  He's changing his name to Homer MLM Simpson to show his dedication & commitment in front of his "Double-Platinum Diamond Distributor/Coach.

The property?  Oh yeah...its still in good shape, in fact, it really is a good deal.  Now.  It can be yours for a little over $400,000.  Needs a little work, but not too much.  If you were smart with your money and still have some, give me a call.  I don't have any get-rich quick steals to show you, but I do know how to spot a solid investment in real estate.

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Rainmaker
663,909
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Kent

That's pretty much what a lot of people did that got them in trouble: used their house as a piggy bank.

Good way to illustrate  how this could have happened.

Suggested this blog...good info here.

Jul 21, 2011 04:11 AM #1
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Andrea Swiedler
Berkshire Hathaway HomeServices New England Properties - New Milford, CT
Realtor, Southern Litchfield County CT

Yes indeed. A few years back when my daughter bought her house (foreclosure) I found this. There were so many refi's one would have expected the house would have been the Taj Mahal! But sadly, the money was used to have a bit of fun for a few years....

Jul 21, 2011 06:16 AM #2
Rainer
12,397
Jerimiah Taylor
Keller Williams Southern Arizona - Tucson, AZ

What amazes me is the mindset of so many of the folks in this situation. I can't count the number of consultations I've had with sellers whom are upside down in the same or at least similar situations, where the seller is in denial that they did any wrong. it's imperative that the lesson we take away from this market is that consumer responsibility both in good and bad markets is important.

 

Had these folks taken that many out and invested it in other real estate, business startups, stocks etc.  Something of tangible value at least, they probably wouldn't have had to see the home go back to the bank..

 

Live and learn right?

Jul 21, 2011 12:31 PM #3
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721,584
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Kent,

The continued cash-out refinancing of homes that led Homer down the path of disaster was disallowed by law in the State of Texas.  Texas didn't let you use your home like a piggy bank.  ...and today, which state has the most robust economy in these United States?  Texas!

Mike in Tucson

p.s.  Re MLM, it's Robert Kiyosaki's (Rich Dad, Poor Dad) favorite business model.  MLM is as hard or even harder to do than any other business.  It takes discipline and WORK.  Where the Homer Simpsons of the world go wrong in MLM is in their expectation that it won't take work to be successful.  Too much sleeping, and not enough work!  :)

Sep 14, 2011 11:50 AM #4
Rainmaker
494,252
C. Lloyd McKenzie
Prudential Allstar Realtors - Albuquerque, NM
MBA - Prudential Allstar Realtors -

Good Evening Kent:

Just stopping by to wish you and your family a Happy 2012.  May you have a successful year in your business

Jan 07, 2012 06:56 PM #5
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252,409
Kent Simpson
Tierra Antigua Realty - Downtown - Tucson, AZ
Real Estate Is About People

Thanks C. Lloyd!  Wishing you the same... how are things going in Rio Rancho?  I used to live in Corrales - over by the Tree Farm.

Jan 08, 2012 12:10 AM #6
Rainmaker
365,076
Inna Ivchenko
Mannis Real Estate Group - Calabasas, CA
Los Angeles / Valley Homes

So many people lost their house because they thought that the prices will remain stable. People were spending like there is no tomorrow.

Aug 14, 2014 12:07 AM #7
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Rainmaker
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Kent Simpson

Real Estate Is About People
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