Property Flipping Scams In Baltimore City
This blog has pointed out that in todays' RE market, fraud is almost indistinguishable from everyday conditions. Inman News, "The perpetrators of a real estate flipping ring in Maryland will be held liable for penalties and restitution, Attorney General J. Joseph Curran Jr. said Monday."
Which raises the question, if RE is such a great investment, why do crooks have to resort to scams? "The court upheld a finding that Lee Shpritz, Lee P. Woody III, and John M. Morgan Jr., had engaged in a flipping scheme to sell and finance properties at inflated values. Additionally, the court upheld a finding that Michael Almony misled home buyers by submitting misleading inflated appraisals."
"Property flipping hurts home buyers and creates significant problems for the neighborhoods in which the homes are located."
14 Comments:
(if RE is such a great investment, why do crooks have to resort to scams?)
Because that is what crooks do. As Hannibal Lecter would say, "That is their nature."
It is only natural that criminals and fraudster would be attracted to real estate right now. To quote another sage, "Why do criminals rob banks? Because that's where the money is."
The RE market today is brimming with neophytes, newbies, naifs, easy marks, you name it. If I were of a criminal bent, I would be all over real estate like flies on smelly stuff.
Separating fools from their money is a time-honored road to easy riches. The key is in finding the fools. Ideally you look for them to congregate in one place, sort of the "fish in a barrel" strategy. That place today is real estate.
Taking advantage of people requires that you play on their greed or their fear. You can make more money playing on their greed because greedy people tend to open up their wallets more easily.
Let the games begin!
I take home about $3600/mo after taxes/healthins/payroll-taxes/401k.
Give the 30% affordability rule, does this mean I should not spend more than 30%*$3600=$1080/mo on a mortgage or rent?
I already spend $1250 on rent for a huge home, so I'm already overspending.
If I were to buy a modest home in my area for $450K, with 20% down ($90K...which I do not have, since all my savings goes to my 401k), then my monthly mortgage payment for a 30yr fixed mortgage would be about $2100.
I'm assuming the interest tax dedudction might cancel out property taxes, but upkeep might add an extra $100 or so per month.
So the total monthly cost would be $2200, which is 60% of my take home pay!!!
How the heck are people doing it?
I make a good salary of $85, which is about the average household income in my area?
Please explain, I'm confused as to who is buying these homes??
CORRECTION TO LAST POST:
Salary of $85K/year.
(How the heck are people doing it?)
Good question. Most of my friends who have bought in Calif over the past two years were selling another home, so they were rolling their equity into the new home. In many cases, their monthly costs were lower because they had a very large down payment.
But for these first-timers or folks putting down 3%, 5%, 10%, I don't have a clue how they make it work. Obviously, using 1-yr teaser rates, interest-only, etc, lowers the monthly substantially. But at these prices, even with creative finance, many still wind up paying 35-45-55% of their take-home pay for housing.
I guess as long as home prices keep going up, there's no problem. But if home prices stagnate or decline, lots of these folks will be in big trouble. And over the next few years, as teaser rates expire and I/O loans convert to principal-amort, we could see a cascading effect.
We are setting up for a very, very long flat or declining period for real estate, given all of the above. But that period has not yet begun.
9:47 anon,
(who is buying these homes?)
See the latest post from Business Week for an answer.
Homes in your area (currently $450K) would need to drop to $85K*3=$255K to be affordable for someone making $85K/year.
Use the multiple of 3 times household income to quickly determine affordablity. That why the entire US is in a housing bubble.
Medain salary nationwide is like about $35K, so that means medain home prices nationwide should be about $100K, but they are currenly $200K.
Basically, prices need to drop by 50% in almost all areas.
Little digression...yesterday on Larry King Live, Donald Trump (asked about Las Vegas ventures and real estate) said :"real estate is booming and I HOPE IT CONTINUES"
I have never heard of Trump say "i hope" about real estate, he is always a " buy buy buy" kinda guy.
9:47 Anon, I think the rule is for gross income. BUT, this is more of a limit than a guideline.
Regarding "who is buying these homes?". Good question. I ask that every day. Probably one of those "creative" people.
Donald Trump should be fired. I rather listen to David LeReah.
"I think the rule is for gross income"
Somewhat stupid rule, since gross can change depending on new taxes, 401k, health insurance, etc.
Irrespective, $85K*30%/12=$2100/mo.
But my take home each month is $3600, so that would only leave $1500/mo for my living expenses of food/utilities/car expenses/etc.
That would not cover my expenses which are typically around $2000/mo.
So it woudl seem that 30% of gross is NOT a good rule. I think 30% of net is realitic. Even 40% of net might work.
"that means they'd allow a PITI of $3200/month"
No wonder we have a housing bubble...
That would be 88% of my take home pay!
That is crazy. Interest deduction would be a non-factor, since property taxes and upkeep would gobble that up.
I suppose those buyers are not maxing out thier 401k, or doing anything else other than paying for their home.
It works for Uncle Sam.
9:47 --
I think you should be happy you have a nice large rental home that you can afford on your take-home pay. You don't have to worry about maintenance and repair issues, nor property tax. Stay there; do not buy now. Buy in couple of years, when prices are once again reasonable, and your salary still assured, or just continue to rent and invest any excess cash. Renting isn't the worst thinig that can happen to you.
I'll tell you how they are doing it in California. Almost everyone we know has refinanced multiple times, taking lots of cash (equity) out and/or HELOCs. They claim they need to do this to "pay off credit card balances and other debts" each time. This means they are living WAY beyond their means, and not worrying about it! (At least that's what I get from them.) They are all stressed out in between because they run out of money and can't pay the minimum balance on their credit cards. Then, they refinance and buy new cars (I'm not kidding), big-screen T.V.s and go on expensive vacations as if they had just won the lottery. They act as if they are suddenly rich. Then, when the cash runs low, they do it all over again. UNBELIEVABLE!!!!
This is why I am not even tempted to buy into this market. Not in the least!
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