That's Me In The Corner, Losing My Deposit
While there have been a few tales of people voluntarily walking away from their down payments because their equity was already annihilated before it was time to close, there’s another side to the coin: Those people who are involuntarily losing their deposits because the declining market is causing banks to require buyers put up more…
While there have been a few tales of people voluntarily walking away from their down payments because their equity was already annihilated before it was time to close, there’s another side to the coin: Those people who are involuntarily losing their deposits because the declining market is causing banks to require buyers put up more than their original 10 percent. And in many cases, the buyers can’t come up with the extra cash so they are losing what they already put down. In these cases, the developer gets to keep the cash, but has to go out and try to resell the apartment at much lower prices. The poster children for this phenomenon are the Pham family, who scraped together every last penny they had to put down $93,199 on a two-bedroom condo in Hoboken in 2005; when it came time to finally close last fall the they found they were going to need to put up another $150,000 or so. It would take us another 15 years to save that money again, Ms. Pham said. End of story: The Phams remain in their old apartment and Toll Brothers keeps the dough. Another buyer had a slightly better ending: They were able to end up buying a smaller unit than the one they were originally in contract for from the same developer. Anyone know instances of this type of thing happening in Brooklyn?
Up in Smoke: The Deposit Vanishes [NY Times]
Ouch, so if the pre-approval lasts only 30-60 days, then why go in for a incomplete home? Yikes. And why would the developer/sponsor accept a down payment based on a pre-approval that they know will expire long before completion? I guess no one foresaw this mortgage crisis all around.
No, Snark, it does not. Its usually only good for 30-60 days.
> “the problem was not the contract with the developer,
> but the bank going back on its contract with the buyer.”
They were preapproved for a mortgage back in 2005.
Three years later they were finally ready to close.
Does a pre-approval generally last that long?
parkedslope,
While I agree with you that buyers need to beware, I disagree with you that these examples are unrelated to the bubble.
Market prices are NEVER set by the “typical” buyer. They are set by the buyer who is willing to pay the most who is often the buyer willing to take on the most risk (e.g., 10% down on projects early in construction without considering appropriate legal protections for all eventualities).
So, in a very real way, the prices at the end of the bubble were set by the people who were, as you put it, “plain dumb”. I wouldn’t call them dumb though. I would call them naive or confused.
And exploiting the naive and confused, while legal, is not ethical in my book nor is it good business in the long run.
Even if you don’t think the developer acted unethically here, I suggest you consider how this affects the developers future business.
Is it good or bad for these companies to be associated with “stealing” people’s deposits? Whether you think it is “stealing” or not is irrelevant. It’s what the general population of future buyers thinks that matters.
Does this make the average (reasonably naive) buyer more or less willing to do business with them?
If the average customer willing to do business with them in the future is less naive than the past, is that good or bad for their profit margins?
Maybe what they are doing is legal, and maybe what they are doing is ethical, but it is definitely bad business.
Ok- I don’t mean to sound repetitious but these are not people who lost their deposits because they couldn’t get a mortgage- they had the mortgages approved already and then the bank pulled a fast one, demanding a lot more money before going ahead. After they had already approved the mortgage. Here we are with AIG saying they have to honor their contractual obligations and pay bonuses, but banks get a free pass on basically breaking their agreements?
Maybe I’m naive, but in these cases the problem was not the contract with the developer, but the bank going back on its contract with the buyer. Why should the buyers lose their money- sorry. I just don’t get it and I think the developer and the bank should take responsibility as well and give these people their deposit back.
To those who try to sell this story as a parable of the real estate market collapse, I say: not so fast.
These people brought this on themselves. Plain & simple.
To put down that much cash, that far-away from the actual closing & to have left themselves no margin of error was plain dumb – bubble or not.
Also, I seriously doubt they had consulted a lawyer before signing the no-contingency contract. Even at the bubble’s peak, there were plenty of contingency deals being signed – and any decent attorney would have advised them to walk away from this lousy deal.
So, no sympathy here for these would-be buyers – or for those who want to portray their behavior as somehow ‘typical’ of people who bought during the bubble.
And please, save the bank & developer criticism for cases where they genuinely acted unethically/illegally. They only took what their contract entitled them to take from a family that willfully over-reached.
If I look back over the years, I’ve done over 20 closings as either a buyer or a seller and I have ALWAYS, no matter how straightforward it looked, used an attorney.
The consequences of a collapsing Mutant Asset Bubble….
The What
Someday this war is gonna end…
For all those who believe that everyone who bought into predatory lending loans were greedy so-and-so’s, or just stupid, this cautionary tale shows that ordinary people, otherwise intelligent people, can sign documents that come back to haunt them. Real Estate is a tricky business, and even the best, even people in the industry, can blow it big time, and lose out. There are very few people who are immune to a really good, sounds reasonable and legal, super sales pitch.
I feel sorry for the Phams, and I hope tales like this will encourage people to read the fine print, do some research, take a class, take the docs to a housing non-profit clinic, or, best yet, hire a real estate attorney. There should be no shame in knowing you don’t know everything.