Sunday, March 30, 2008

The Serial Refinancer

Today we have a case where the owners could have made out very well on their property. The owned it for almost 9 years and could have walked away with almost $300,000 in the bank when they sold this property. Instead they decided to become serial refinancers. It looks like it started to get a lower rate, but then something changed and they decided to start taking money out of their property. Now it looks like it they will be lucky to break-even. I have seen other cases on craigslist of people not wanting to pay a realtor commission - some state it out-right. They do not seem to be listed with any for the for-sale-by-owner with MLS lists. This sale may be so tight they can't take the 6% hit but they do not know how to aggressively list the property themselves.

Here is the property -

The description -
Lincoln Park, NJ: For Sale By Owner Large 5 Bedrooms/3 Bathroom home in a great location of Lincoln Park. Quiet, family-friendly dead-end street in a desirable non-flood area. Living room with recessed lighting. Gorgeous fireplace and separate sitting area. A beautifully updated kitchen with granite counter tops, tile floor, and custom-made island. Family room has an efficient wood stove and charming slate floor with recessed lighting. Master bedroom has a private bathroom. Sliders from the newly renovated dining room to a large and lovely patio and a scenic backyard with an enjoyable above-ground pool. Perfect for your large outdoor get-together. It is public water and sewer. Approximate taxes: $ 7500

And here is the financial side of the property -

  • The property was purchased in May 1999 for $234,000.
  • The original mortgage from May 1999 is unavailable online.
  • The owners took a HELOC out in Jan. 2003 for $25,000 with First Horizon Home Loan Corp.
  • The owners took a mortgage out in Jan. 2003 for $154,000 with First Horizon Home Loan Corp.
  • Yet another mortgage the next May (2004) for $148,500 again with First Horizon Home Loan Corp.
  • In Sept 2004 they took a larger mortgage, this time for $344,000 in an ARM with Washington Mutual, the loan was closed Nov 2006.
  • Some time went by, but in April 2006 the owners took a $170,000 HELOC with Bank of America, this was closed Nov 2006.
  • In Oct 2006 the owner refinanced again for $402,500 with REMI Capital.
  • Approximately 3 months later in Jan 2007 the owners took a $100,000 HELOC with Bank of America.
  • Currently on sale for the reduced price of $489,000 on craigslist.
The owner could have walked away with a minimum of $282,000, that would be if they did not put anything down in 1999 - which was very uncommon at the time. In May 2004 they probably owed $173,500 assuming their 1999 and 2003 mortgages were paid off but not in the database. They decided they needed the money in 2004 so they refinanced for more than the original purchase price with what looks like a large cash out. This cash-out was probably around $170,500, the renovations do not look like they were that expensive. The kitchen probably incurred some money but since it is limited to counter-tops, floors and the center island it is less than the $50,000 average spent on kitchens. Not sure what was done to the dining room received, unless they knocked down walls since new floors are not mentioned, maybe new chandelier and moldings. But that money was not enough since the received another sizable HELOC. It looks like within 6 months they spent another $58,000 so they rolled up the HELOC and last loan into a new loan. However, they needed that HELOC so within three months they took another $100,000. My guess is that they spent approximately $86,500 or close which is why they are not using a realtor.

Either way these serial refinancers went from a great position to have a large net equity even with small changes. Now they are going to be lucky if they break even. We know they did not spend that $282,000 on a granite counter-tops and other kitchen enhancements. So in the 5 years in which they took seven different loans they averaged spending approximately $56,400 per year using their home equity as an ATM.

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