House Worth Less Than Mortgage – Is it really such a bad thing?


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There is an area about 45 min east of downtown Phoenix called “Queen’s Creek.” A couple of years ago, developers were going crazy building nice houses out there. My first issue with that is that it’s 45 minutes away when the traffic is moving like it should. When it’s not, add another hour or so of commute time each way.

In my opinion, those subdivisions were doomed just because of that. But, I walk to work, so commute is foreign to me anyway. But this has really gotten a lot of local press as one of the “bad examples” of lender and developer irresponsibility and it got me thinking. Let me ask you, is this really such a bad deal?

The developer sold the house for $400,000 and put $100,000 aside for upgrades like landscaping, a pool, etc. The buyer got a 100% financed house. Upon close of escrow, they got a check for $100,000. Cool! They didn’t just get a no money down house, they got a house PLUS $100,000.

But, how much was the house really worth? It wasn’t just you that got that deal. It was everyone in the whole subdivision. So, the house really is worth $300,000. It’s just that you basically got a low interest loan for $100,000. I’ve got to tell you, as a business owner, I’d love to get a 6%, 7% or even 8% loan to grow my business. AND get it either interest only forever or with a 30 year amortization. I mean, come on, what business owner WOULDN’T love this?

The problem was that people bought the house thinking that somehow they were smarter than everybody else and that somehow they just got a $400,000 house for $300,000 and the $100,000 was their reward for being smart. So, they took the money and spent it.

Now the money’s all gone, and the house is only worth $300,000 (which is what it was in the beginning!) Or actually, it’s only worth about $250,000 now because a few of the neighbors have defaulted and the mortgage companies have allowed short sales that have reduced the neighborhood’s value.

Meanwhile, everyone is blaming the developer and the lender. Well, maybe they should have explained that the “wink wink” when they said how much the house was worth was really meaning “hey, we’re cheating here to get you a great loan and don’t be an idiot about it” but they didn’t.

For me, I’d love to get a $100,000 loan with low interest and interest only payments that counts as a mortgage and NOT a revolving credit line on my FICO score. Anybody got a few of those deals lying around still?



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