Returning to the Basics in Funding Real Estate

Beginning in the late ’90s, and in response to the Community Redevelopment Act, the Inland Empire and the rest of this country saw a surge of „fantasy funding“ unlike anything since the practice of buying stocks on margin in the 1920’s. Banks were compelled to make loans to potential homeowners in the spirit of egalitarianism rather than the more traditional profiling used to determine a viable loan candidate.

In response to the frenzy to fund homeowners wanting the „American Dream“, builders, lenders, and realtors in the nation became extremely successful by filling the pipeline. Financing for residential and commercial properties became „exotic“ and such loans allowing „less than principle and interest“ payments became more prevalent than conventional products. Borrowers, as well as short-sighted lenders, weren’t concerned with the realities of economics, and thus began the trend to „borrow any sum, buy at any price.“ Value had no meaning. Inland Empire properties were snatched up buy teams of investors thinking they could lease-option these homes.

The argument was, „Since real estate always goes up, it doesn’t matter how much you pay because you can always sell later for more money.“ It wasn’t trendy to finance under terms which paid down a mortgage, because equity appeared through appreciation. Debt was something to be serviced, not retired; and there was no need to be building equity through the traditional practice of retiring debt through amortization. Besides, paying down the mortgage required sacrifice, thrift, and was a slow process and building equity through the rapid appreciation experienced here in the Inland Empire was much faster and required much less sacrifice. This euphoria appealed to the fantasies of unlimited wealth and spending power.

Today, the fundamental belief in unstoppable property value has been challenged. All the requisite notions allowing such thinking now require facing principles of economics. Fortunately, many people have now begun to modify their thinking. No longer can a home buyer rely on the subterfuge of borrowing real estate purchase money without disclosing and verifying income, savings, and employment.

Immobilienmakler Heidelberg

Makler Heidelberg

Source by Mark Randall Richards

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