Would like to know if this property is a bad investment or not

a1234qwerAugust 31, 2010

I would like your opinions on whether a condo owned by a friend on mine is a bad investment or not. A friend of mine bought a three bedroom condominium in Laguna Niguel in Orange County a few miles from the ocean about five years ago for $490,000. Since the beginning he has only paid the interest and taxes on the place and none of the principal because he cannot afford anymore than the interest and taxes. Because he could not make the payments a few years ago the lender reduced the interest rate to just under 4% and extended the mortgage from thirty years to forty. The current payment, both interest and taxes, is $2600 per month. The condo also dropped in value when the bubble bursted by how much I donÂt know but probably a significant amount. The condo probably will not reach the original $490,000 value again because the reason that real estate values went so high was the ease of lending which probably wonÂt happen again because lending is more regulated now and lending institutions are not as heavily backed by the insurance industry so heavily hit when the bubble bursted as a result of the economic downswing. When doing the present value calculations of the mortgage payments on the condo and comparing that to rents of a comparable place in a comparable area the condo is almost definitely a better deal than renting in the long run but when compared to condos in a more reasonably priced area the difference in the total amount paid on interest is huge. Also, since my friend will probably only have one other person contributing to the mortgage payment throughout the length of the mortgage a two bedroom condo in a cheaper area makes even more investment sense. My friend says that he can short sell the condo and get away with not having to pay for the drop in value to get the place off his hands. I believe short selling the place and eventually buying a two bedroom condo in a cheaper but still nice area for around $300,000 is the best option out of keeping the condo he has, renting in the same area, or renting a two bedroom place in southern California in an area that is cheaper yet still pleasant. What do you think?

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dave_donhoff

The *REAL* cold-hearted amoral strategic question is...
Which is more likely to happen faster;

A) Your friend's credit heals & recovers from the shortsale, and the required time passes for lenders to ignore his prior transgressions,

OR,
B) The coastal Orange County condo market comes back & appreciates beyond the gain he would get by shortselling out of his existing commitment.

I'd expect #B to be more likely to happen sooner... but again, this is the AMORAL consideration.

Luck to your friend!
Dave Donhoff
Leverage Planner

    Bookmark   August 31, 2010 at 1:07PM
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Billl

"The condo probably will not reach the original $490,000 value again because the reason that real estate values went so high was the ease of lending which probably wonÂt happen again because lending is more regulated now and lending institutions are not as heavily backed by the insurance industry so heavily hit when the bubble bursted as a result of the economic downswing. "

I'd give the odds of this statement being true at about 0%. 50 years from now, your friend will look back and tell his grandkids how people used to be able to buy a house for "ONLY" a half mil. The question is IF property values will rebound but WHEN. Unfortunately, nobody knows the answer.

BTW - your friend really needs to consult a lawyer. California law is pretty strange for foreclosures and short sales. The recourse rules change if you refinance but I'm not sure if they treat the loan restructuring the same way. He may be right about being able to "get away with it" but I wouldn't assume that is necessarily true.

    Bookmark   August 31, 2010 at 1:30PM
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a1234qwer

Of course the prices will be above what they were five years ago, but not likely when adjusted for inflation. Always think and speak in real dollars.

    Bookmark   August 31, 2010 at 3:29PM
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Billl

"Of course the prices will be above what they were five years ago, but not likely when adjusted for inflation. Always think and speak in real dollars."

If you don't think property prices will ever increase in real dollars, then why are you recommending your friend by real estate?

    Bookmark   August 31, 2010 at 4:19PM
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sheilajoyce_gw

There's more to consider. Where is this owner working and must he live in a certain area to maintain his employment? Is this friend the only resident of the condo? If the friend has kids, where could he or she move where the schools are as good as where he is now? If the friend plans to move to a southern California $300,000 condo, is the new neighborhood truly comparable? I doubt it. Not enough information here.

    Bookmark   August 31, 2010 at 6:39PM
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Gina_W

"I would like your opinions on whether a condo owned by a friend on mine is a bad investment or not."

Obviously it is a bad investment. An investment gives you a return. I doubt he will ever see a return on this condo the way he is paying for it now - on a 40-year mortgage. At that rate he will build equity at a snail's pace. He is probably paying a high interest rate for that 40-year albatross too.

He has property tax and HOA dues as well - which I guess add another $700 or so to his monthly nut.

It's crazy. He is a victim of his own greed, which has turned around and bit him, hard, on his behind - which should be in a rental. Nothing wrong with renting.

    Bookmark   August 31, 2010 at 7:37PM
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blueheron

It makes it easier to read your post if you paragraph it. Just a suggestion. I get tired halfway through reading this kind of post and stop reading it.

    Bookmark   September 1, 2010 at 5:59PM
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mariend

Orange country RE is up/down and all the way between. Relative lives in area and houses built by a spec. developer asked over 1m, sold 2 for much less, and the other 3 still not sold--only 1/2 mile from ocean.
Talk to lawyer first before you do anything. By the way, these houses have been empty for at least 2 years.

    Bookmark   September 3, 2010 at 3:23PM
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