Fantasy Financing

We call it “fantasy financing” and it is not peculiar to America. A property is valued, on paper, at Five Hundred Thousand Dollars. It may stand on what can be called “negative dirt”,(meaning the area is not desirable) or be valued by the square footage with no reference to what is encompassed in that footage.

In a real assessment, (what a purchaser would actually pay),  is Two hundred and fifty thousand dollars. Banks and other lenders, however, read the On Paper valuation and act accordingly.

Hence Banks and other lenders wind up with a huge portfolio of unsellable properties. The properties are costing the lender a great deal of money to simply manage. Hence that property, which would have sold for two one hundred and fifty has cost and is costing the lender sums so that to ‘break even’ it would have to sell for six hundred thousand dollars.

This is one of the root causes of America’s melt down in the housing market; fantasy financing. It happens periodically. It is predicable.

It happens when people can purchase a home, and seeing values increase decide to speculate, purchase other properties using their home as security, taking mortgages. Those who get in early and get out early, make money. Those who get in late, lose everything.

Wise advisers will always say something to the nature; “Whatever you are going to purchase, have twice as much money as the purchase price.”  Wise advisers with warn not to use the house one actually lives in as security for anything  Wise advisers warn never to take a loan with a “variable” interest rate. Always know exactly how much you will be paying for the length of the loan. If not, don’t borrow, or don’t borrow under that scheme. If you have X dollars in the bank you can use as security for a loan, and wish to use that loan to purchase a home, all you stand to lose is the money in the bank, not the home.

Buying a premises at auction often is closer to the real value than buying it from a vendor.  Although it seems a  “super bargain” to take that house valued at Six Hundrend an Seventy Thousand Dollar for Two hundred and Sixty Five, that is what it would have sold for BEFORE the Fantasy Financing.

As America works it way out of this recession,  property will begins to appreciate, and the new owners might sell it for three hundred thousand dollars.

And then another “boom” will begin.