Sunday, January 4, 2009

Equity Extracting in Lincoln Park

During the housing bubble some interesting things occurred. Those that bought pre-bubble or early bubble seemed to automatically have equity in their property. So HELOCing some of it became a standard operating procedure for homeowners that wanted a little something extra in life. However those that bought too late into the bubble never really had the equity to extract. Some tried and took out whatever downpayment they made, but this was usually negligible.

Our featured property today was one that bought too late into the housing market to really extract much equity. Pretty much all the equity extracted was limited to the original downpayment. It seems they tried by opening 3 HELOCs in the first 13 months of home ownership, but the bubble was over and they were never really able to extract enough. Lets take a look at this Lincoln Park equity extractor -

Here is the property -

The front of the property.

The kitchen with the stainless steel (faced) appliances and possibly granite (but tile) countertops.

The dining room with nice hardwood floors.
(But it must be small with the 4th chair removed due to the server).

Here is the property info -

Interior Features
Carbon Monoxide Detector, Central Vacuum, Dishwasher, Dryer, Kitchen Exhaust Fan, Microwave Oven, Range/Oven-Gas, Refrigerator, Washer, Eat-In Kitchen, Pantry, Carpeting, Ceramic Tile Floor, Walk-In Closet, Basement Level Rooms: Family Room, Inside Entrance, Laundry Room, First Level Rooms: Dining Room, Foyer, Kitchen, Living Room, Powder Room, Second Level Rooms: 2 Bedrooms, Bath Main, Bath(s) Other, Master Bath Features: Jacuzzi-Type, Stall Shower

Exterior Features
Barbeque, Curbs, Deck, Patio, Sidewalk, Storm Door(s), Storm Window(s), Tennis Courts, Underground Lawn Sprinkler

Community Features
Jogging/Biking Path, Pool-Outdoor, Association Fee Includes: Maintenance-Exterior

Here are the financials -

  • The property was purchased in May 2005 for $405,000.
  • The original mortgage for the property taken the same day as purchase was for $324,000 using an ARM (that would not adjust for the first 10 years ) with GMAC Mortgage Corp.
  • On the same day as purchase a HELOC was opened for $40,000 also with GMAC Mortgage Corp.
  • In October 2005 the old HELOC was closed and a new HELOC was opened for $82,300 and still with GMAC Mortgage Corp.
  • In June 2006 the second HELOC was closed and a new one was opened for $87,800, yet again with GMAC Mortgage Corp.
  • The property is currently for sale by owner for $389,000.

So what can we tell about the ownership? First that the owner put significant amount down - 20% which was $81,000. That was a huge amount down during the bubble and still is pretty significant. However, almost half of that was opened in the HELOC. During the bubble HELOC were often opened for emergencies or just to have one. Often they could be done as part of the closing for nothing, just as part of the closing.

This owner must have needed to use the HELOC, since just 4 months after opening the line they had it doubled. Accessing the new HELOC would mean extracting all the down payment plus another $1300. And yet just 8 months after the first jump the owner reopened the HELOC upping it another $5500. This would take at all of the down payment of $81,000 plus another $6800. Not that much extra equity extracted, but the bubble was pretty much over at this point.

But at some point in ownership the amount owed could have reached $411,800 on this property. May still be that high - since HELOC are often interest only for the first 10 years and paying mostly interest on the standard mortgage.

Now this property is for sale, and the owner decided to sell it FSBO using a service that lists with MLS for only $395. The big hope for this owner is that it sells for as close to full asking price as possible. The current difference between what is possibly owed and the selling price can be as much as $23,195, and that is it sells for full asking price. That is a big check to bring to closing.

Although we have no way of knowing our guess is that the $389,000 will allow the owner to walkaway without having to bring a check at closing. The other alternative, often a dud, is negotiating a short sale. [Side note - Remember when the bubble first burst short sales were the big thing? Now we rarely hear about them anymore - short sales were more make shift than a solution driven process. The red tape involved seemed to frustrate buyers and sellers alike.]

As we noted above, this homeowner extracted little more than the original downpayment. Probably if the bubble remained for a few more years we would have seen some real HELOC heaven in today's example. However, due to timing this owner this owner was unable to extract any additional equity.

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