Sunday, January 18, 2009

Cashing Out in Wharton

One favorite bubble sport was to cash out any equity as soon as it was accumulated. People no longer had to work to have extra spending money - their house was giving them great returns. Owning a property was essentially having a second income if you cashed in at the peak. Some seem to have invested the money on the property - but much of the money helped fuel the retail frenzy of the past decade.

Looking back it is easy to view it as an illusion that did not make sense. But at the time it seemed normal and ordinary. Just owning a home was giving people an excellent salary when properties were growing at double digit rates a year. A Refi cash-out or other equity extraction could easily net a five figure income for most owners, sometimes more. If you sold still in the bubble, you kept the cash, for those who waited they are underwater. Now selling either means a short sale or bringing a check to closing. Once the house paid you, now you have to pay the house. Timing really is everything. Which brings us to our feature today - cashing out at the high, but staying in the game and now owing. Lets take a look -

Here is the property -
A view of the uh, ah, front... or maybe side...
The Living Room.

The Master Bedroom.

Here is the property info -

Property Features
  • Single Family Property

  • Status: Active
  • County: Morris
  • 3 total bedroom(s)
  • 2 total bath(s)
  • 2 total full bath(s)
  • 9 total rooms
  • Style: Colonial
  • Master bedroom
  • Living room
  • Dining room
  • Family room
  • Kitchen
  • Office
  • Basement
  • Bathroom(s) on main floor
  • Master bedroom is 18x11,Includes: Full Bath, Walk-In Closet
  • Living room is 19x15
  • Dining room is 10x10,Formal Dining Room
  • Kitchen is 10x10
  • Basement is Partially Finished
  • Hardwood floors
  • Fireplace(s)
  • Fireplace features: Family Room
  • Parking space(s): 2
  • Heating features: 1 Unit, Baseboard - Hotwater, Multi-Zone,Electric Water Heater,Oil
  • Central air conditioning
  • Cooling features: 1 Unit, Ceiling Fan
  • Exterior construction: Composition Shingle
  • Roofing: Asphalt Shingle
  • Pets allowed
  • Lot features: Level Lot, Open Lot
  • Approximately 0.3 acre(s)

Here are the financials -

  • The property was purchased in September 2004 for $290,000.
  • The first mortgage at the time of purchase was for $232,000 with Indymac Bank.
  • On the same day as the first mortgage, a second mortgage was opened (commonly referred to as a piggyback mortgage) for $58,000 also with Indymac Bank.
  • In October 2005 the property was refinanced using an ARM for $300,000 with First Continental Mortgage and Investment Corp.
  • The property was refinanced in April 2008 for $368,445 through MLD Mortgage.
  • The property is for sale through a realtor for $329,000.
  • Property taxes for 2009 are $7214.15.

There was no money down when the house was purchased. Using the piggyback loan approach the owner had no equity at day of purchase. That was apparently the owner's trend. Since as we see within 13 months $10,000 was extracted from the property. Not bad a bad income for the first year of ownership. Renting this person would have been out their money, but owning they received a cash-back refund basically after the first year. A real bargain.

Then 2-1/2 years later they extracted another $68,445 out of the property. Now the property was paying them another $27,378 per year just to live there. Not a bad deal for the owner. But one has to question MLD Mortgage business plan to pay out this money long after the bubble burst. Paying out $39,445 more than the property is listed for just 8 months later?

Over the the 4 year, 5 month of ownership the property was providing the owner's a second income of just under $18,000 per year. What a deal. The house was basically paying for itself. Imagine living rent or mortgage free for over 4 years! Great deal for this enterprising owner.

Now, with the new selling price, and assuming the realtor receives the standard commission, the property will lose $59,185. And that is if the property sells for the full asking price. Which would be shocking if it did. So now we wonder who will be eating that $59,185 - the lender or the "owner." In this example "owner" is definitely in quotes. They never appeared to have equity in the property at all over the entire time of "ownership." The property was 100% plus lender-owned during the entire 4 plus years the "owners" occupied the premises and had their names on the property listing. But like we said it is a great deal for the "owner" if they are not bringing a check to closing.

And now lets take a look at the prospects for the new owner. Paying asking price with a 20% down payment, with taxes, and a 30-year fixed at a common 5.25 rate the new owner will have to pay out approximately $2054 per month plus insurance and other expenses. That is a pretty hefty amount for Wharton. And this neighborhood has many, many properties for sale right in the vicinity. Good luck!

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