Watching a financial Train Wreck

[Lonewolf]

A friend recently showed me a website:

iamfacingforeclosure.com

This is a blog of young man who purchased eight houses in eight months with no money down and got cash back at settlement for many of the transactions. As a typical believer in get-rich schemes he thought it would be easy to fix up and flip the houses, but that fell apart like a house of cards. He is now in almost 2 million dollars in debt.

Now a word of warning, going to the site will just sap your intelligence as his posters are usually not much smarter then he is, but it makes me wonder how much responsibility does the banking industry have for the debt ticker that keeps going up and up on this website? I realize that in this case this person worked the system, tried to get rich, and is ultimately responsible for the debt, but shouldn't the banks have done more due-diligence? It is amazing to me how much money companies will give people even thought their salary clearly doesn't match future payments.

Every once in a while I have to go to the site just to see if he has been arrested yet, but makes me very grateful that I'm worried about upping my retirement savings 1% vs paying 2 million in debt.

Wolf

[Joan.of.the.Arch]

I always figure I am too ignorant to know how to make money doing something like that. Not dumb, just ignorant. I am smart enough to stay away from it. But I do admire people who have the smarts, have the spine, have the integrity to fix up the houses well, and do well financially as a result. The train wreck types? Oh dear, I just hope they don't take too many people down with them.

[Broken Arrow]

The thing is, it is indeed possible to make money flipping real estate. I know a couple of people that is doing it with a fair amount of success.

However, the trouble doesn't lie in the concept. The trouble lies in the execution. Some people charge in haphazardly, without really understanding what they're getting into or how to get ahead. And when these people lose out from this kind of business, they fall HARD.

Relevant link

[sweeps]

The banks were foolish to make those loans, but they're not out the $2 million. They're probably just out $200-$400K because after all they can always sell the houses -- at a loss if necessary. But your point is well-taken.

[JanH]

What gets me is that in the late 70's and early 80's we had to beg for a credit card because as students we didn't have much income, even though we had no debt. We needed a card back then to write checks. Stores wanted two id's--one a credit card. I don't remember if we approached our bank. We got a store card finally. Now, my kids in college get more credit card offers than I do! I often wonder how the financial world changed so completely in the last couple of decades.

[DebbieL]

Alot of this stupidity is happening in the "crazy" housing markets. People are too dumb to realize that property can't keep doubling in value every couple of years when there are no fundamentals to back it up. Sooner or later these things crash! The last person left holding the bag is SOL. Where I live (Victoria, BC) the housing bubble is sure to burst soon, and then all these people buying houses with no money down and crazy loans will be crying for sure. There is no way the average house here should be selling for $540K when the average household income is about 60K, kwim? When you have to ask yourself where the hell the money is coming from, then there's something wrong. A few years ago I knew that either everybody but me was somehow "rich", or they must be taking on a LOT more mortgage than a sane person could reasonably handle on the local wages. Somethings gotta give, and I really have no sympathy for greedy idiots. I am a renter because of the insane price increases around here. I could NEVER afford a half million dollars for a house on what I make! I'm waiting for the fire sale that is surely coming in the not too distant future.

[PRICEPLUS]

Always best to be careful with what you are doing financially. Sometimes things work out and sometimes they don't. It sounds like the young man is in way over his head. What are the banks thinking.... PROFITS!!:

[disneysteve]

Originally Posted by Lonewolf

I realize that in this case this person worked the system, tried to get rich, and is ultimately responsible for the debt, but shouldn't the banks have done more due-diligence? It is amazing to me how much money companies will give people even thought their salary clearly doesn't match future payments.

As much as I preach personal responsiblity, I can't ignore the fact that today's personal debt mess essentially started with the deregulation of the banking and credit industries.

Years ago, we used to joke that the only way to qualify for a bank loan was to prove that you didn't really need the money. Today, anyone with a pulse can borrow multiple times their annual income with no problem. It's really insane.

When I was in college, my friends and I used to go to the mall and apply for all the store cards just to get the free gifts. We knew there wasn't any chance we'd be approved because we had no jobs and no income. Today, the credit card companies can't hand out cards fast enough to college students, who still have no jobs and no income.

The rule of thumb for buying a house used to be 2.5-3 times income. Today, people are routinely buying homes for 4-5 times income and having no trouble at all getting loans.

In the not so distant past, we didn't have check-cashing stores, payday loans, instant tax refunds and other such nonsense. Why? Because there were laws that limited the interest and fees that could be charged. Once Congress did away with those laws, all hell broke loose. Now, the tax places give refund anticipation loans but charge 200% interest or more.

Personal responsibility is very important. But the bottom line is that if you never give someone a rope, they can't hang themselves.

[Duchesse]

Real Estate like most profit turning investments is long term.

Buying and flipping RE is a short term investment. Like most short term investments if you are going to turn a profit you had better know what you are doing and be "on point" or you'll lose your shirt.

[poundwise]

Of course, one of the problems with people like this is that, rather than follow some sort of solid strategy for investing in property they are looking for the get-rich-quick, no money down, late-night infomercial, pseudo-system; lured by the supposed ease by which this can be done with no money and no experience. What a joke.

[Broken Arrow]

I agree wholeheartedly with the responses so far. Some day, I'll be trying my hand in RE (on a small scale), but not until I am good & ready!

[Elgin526]

It's not that this guy tried to flip a house, it's that he tried to flip 8 of them at once! Experiance flippers with decades of experiance often don't do that many at once. What the heck was this guy thinking!

I did a 3% down mortgage when I bought my condo. I made $50,000 in four years on that deal, using hardly any of my own money, all the while having a nice place to live. So low or no money down loans aren't always bad. But like anything else you still need to know what you're doing and you still need to be able to make that mortgage payment each month.

[markio26]

i would not try to flip a place in this market, unless it was $25000 investment, no higher......i have had a cpl. good success stories, but, a land contract for two years, with a baloon pmt was used with great profit..

[sweeps]

My house is up for sale now. It's definitely a different market from a year or two ago. We've had a lot of showings, but buyers are getting picky. Some people haven't experienced a normal market (or they've forgotten what a normal market is like).

[Duchesse]

Originally Posted by Sweepsplayer

My house is up for sale now. It's definitely a different market from a year or two ago. We've had a lot of showings, but buyers are getting picky. Some people haven't experienced a normal market (or they've forgotten what a normal market is like).

I'm in the same boat right now. If I don't close in two weeks, I've already instructed my lawyer to return the check. I'm going to have to move forward. The wait is getting ridiculous now.

[humandraydel]

For some reason this whole story seems contrived. If it's not, this guy is perhaps the stupidest person in the world. And he's still enamored with Kiyosaki? please...

[shelbylovesmelby]

I agree I think he could of made a go of it just not to get too far over your head... like start @ 1 @ a time & go from there.

Like everyone else said what kind of DTI does this guy have that he can have 8 houses to manage & try to "flip"

The news has said nothing but negative things lately in the houseing market that it's a buyers market not a sellers + w/ the darlings who got the ajustable mortgages are just kicking themselves & hard!

[markio26]

the housing market is pretty slow in ohio... i see homes sitting for 3 yrs. below market value... i think alot of ppl. are moving out of our cleveland area.......

[starving_student]

I think flipping is immoral. Those flip this house shows are driving me nuts. How can people be so full of tehmselves and so concern about making so much profit. Housing is a necessity. It's a need not a want, why do people try to make fortune out of that....

[rob62521]

[quote=disneysteve].

Years ago, we used to joke that the only way to qualify for a bank loan was to prove that you didn't really need the money. Today, anyone with a pulse can borrow multiple times their annual income with no problem. It's really insane.



The rule of thumb for buying a house used to be 2.5-3 times income. Today, people are routinely buying homes for 4-5 times income and having no trouble at all getting loans.

QUOTE]

You hit the nail on the head. A few years ago when we needed to find the balance to pay off our house, we had to wait while the bank figured it out and called us. When I wrote the check to pay it off, while the personal banker was filling out the papers, her next comment was, "Don't you need a home equity loan to fix up the house you just paid off?"