Jun232014

Bad condominium investments that keep on losing

Condominium investments go bad, and sometimes the property can’t be rented out to cover the expenses. Owners can’t sell and can’t rent, so they lose, lose, lose.

trump_towersI don’t like speculating on investments with negative cashflow, particularly in real estate. If the purchase does not go as planned, the negative cashflow relentlessly drains your income, and in some circumstances, you simply can’t get out.

During the Great Housing Bubble, many speculators tried to make money through trading houses. The vast majority of these traders were not professionals but amateurs who thought they could be professionals. Most amateurs ended up losing money because they did not understand what it takes to be successful in a speculative market.

The public adopts a “buy and hold” mentality where they accumulate assets with an eye supposedly on the long term; everyone wants to be the next Warren Buffet. In reality this buy-and-hold strategy is often a “buy and hope” strategy — a greed-induced, emotional purchase without proper analysis or any exit strategy, and since they have no exit strategy, and since they are ruled by their emotions, they will end up selling only when the pain of loss compels them. In short, it is an investment method guaranteed to be a disaster.

speculator_emotional_cycle

North Korea Towers

My favorite condo complex of the housing bubble was the Marquee at Park Place, also known as the North Korea towers because the low occupancy meant all the lights were off at night.

Back when I wrote at the Irvine Housing Blog, I profiled these units often. It’s rare that I lose my composure in the comments, but when this fool who was about to lose half a million dollars actually accused me of being jealous of her good fortune, I couldn’t help myself:simple_life

Comment from a resident:
2007-01-03 04:56 PM

Everyone is entitled to their opinion, and sometimes its good to keep it to yourself.  It is very simple, for those of you that don’t like Luxury living in a place like Marquee, hey, no one is forcing you to buy here. stay where you are and be happy, what is with all the bitterness. Your bitterness is in result of ENVY.  Chill out. Those who buy or bought at the Marquee made a choice and obviously like their investment.

Comment by me:

2007-01-03 09:10 PM

(Resident)

“Everyone is entitled to their opinion, and sometimes its good to keep it to yourself.”

You should have followed your own advice.

“what is with all the bitterness. Your bitterness is in result of ENVY.”

You people don’t seem to get what we are saying, so I will try to spell it out for you:chic

WE

DON’T

ENVY

YOU:

WE

PITY

YOU.

You have made the worst possible purchase in all of Orange County. When the flippers can’t make the payments and are forced to sell, the value of your units is going to plummet: more so than others because your fees are so high. Every time we on this board drive by, we look up with amazement at the monumental folly of buyer greed. Your dark tower is going to stand as the symbol for the height of hubris of the housing bubble.

We don’t envy you, we are very thankful we are not you.

P.S. Please ignore my previous post where I tried to make nice, reinforce your delusions, and leave you with a shred of dignity.

I’ve often wondered if she remembered that exchange as she watched the value of her precious investment drop by 70% shortly thereafter. When I think about it, I still giggle.

Condominium Ownership Is Becoming the American Nightmare

By Amanda Alix, June 15, 2014Marquee_Park_Place

Many homeowners who have bought into the American dream by purchasing a condominium are now regretting that decision, as some find themselves unable to sell or rent their units, while others face court battles with investors trying to force them out of their homes.

Like other types of housing, condos experienced buyer popularity during the housing boom. But the housing crash put an end to that party, too, and numerous condominium owners are still being negatively affected by the housing crisis. Many are finding themselves stuck as stringent lending regulations make selling nearly impossible – even as condo rules stop them from renting their homes as a stopgap measure.

They can’t sell and they can’t rent; it’s the worst possible outcome. At least if they could rent the property, they could reduce the monthly cash drain.realtor_nonsense

When the housing market crashed, many speculators found themselves with large monthly debt service costs and no income to offset expenses, so many quit paying their mortgage obligations and allowed the property to be auctioned at foreclosure. Many chose to rent the properties to reduce their monthly cashflow drain, and they became accidental landlords — also known as floplords – flippers turned landlords.

Most floplords aren’t covering their monthly expenses, so the losses on the ”investment” continue to mount. Floplording is a convenient form of denial for losing speculators because they believe they buy time until prices rise again, allowing them to sell later either at breakeven or for a profit. Since they bought in a speculative mania, they continue losing each month with no end in sight.

Part of the problem concerns changes made by the Federal Housing Administration over the past few years. In an effort to protect taxpayers from risk, the FHA has tightened condo lending rules to the point where obtaining a mortgage for such a purchase is almost impossible.

Because the FHA rules apply to the entire development, even buyers who would qualify for such a loan won’t be able to get one. …

Once a condo complex becomes ineligible for FHA financing, property values immediately crater. It actually makes a good opportunity for a patient cash investor who can wait until FHA buyers can qualify because the moment that happens, prices shoot right back up.

Some owners try to salvage their soured investment by renting their home, but often run afoul of condo board rules on the subject. Many developments only allow a certain percentage of units to be non-owner occupied, often because financing options will be much more restrictive for buyers if too many apartments are rented. But, that rule can backfire, essentially dampening prices in the entire complex when prospective buyers realize that they won’t be able to rent their unit if the need arises. In addition, condo prices can be depressed if desperate owners need to sell the unit at fire-sale prices, just to be free of the problem. …

While the luxury condo market seems to be making a comeback, the owners of more affordable units seem stuck in limbo – or worse. For many of those who had hoped to use a condominium purchase as a starter or retirement home, the housing crisis continues – for some, seemingly without end.

check-out-of-american-dream

The main reason I don’t like negative cashflow investment is because the worst-case scenario can and often does come to pass. Most people don’t consider the possibility that their investment won’t go as planned, and the few that do blithely assume they will just rent it out until prices come back. The rental income is never enough, and in some circumstances, they can’t rent it at all.

[listing mls=”OC14126793″]