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Negitive equity?

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default Negitive equity?

Post by GB on 16th December 2011, 4:41 pm

As many of you know, my mum and I are trying to buy some property so I can start a business raising and selling meat.



I have found a lovely 10 acre farm with a fantastic log cabin for my mum to live in.



They are asking, depending on where I look on line, between 50 to 100 thousand above market value.



Its been on the market for 183 days.



Hubbs and my brothers all say only give below market value but the reason they haven't sold before now is they are holding out for their asking price because the place is worth it. Custom built home, a lake and pond and fenced and cross fenced.



If they take our offer of a thousand a month it will take me 21 years to pay their asking price.



So my question really is, what difference does negative equity make if buying into it gets me my farm and business?

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Post by freebird on 17th December 2011, 1:13 pm

Well GB, I thought everybody would have been jumping in here with their thoughts on negative equity.

I'm gonna stick in my two penn'orth, but when it comes to money I keep it simple. My personal opinion is that, providing you can afford it, and providing you have no intention of selling, I can't see that negative equity matters a jot. However, don't be surprised if everyone does jump in now, and falls about laughing at my naivety (as opposed to my nativity).
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Post by mark barker on 17th December 2011, 1:59 pm

I agree freebird, negative equity only exists at the point of sale... So if you're looking long term it really doesn't matter what you pay now, only what you sell for in the future (and who knows, you may find a huge deposit of something rare and make your millions Wink )

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Post by Mike on 17th December 2011, 2:16 pm

You are perhaps not looking at this the right way?

The most likely reason that the current owners are asking 100K above the current market value (and haven't had any takers for half a year) is that they are in a negative equity situation. Perhaps paid for this property (and have a mortgage for) what the market value was a few years ago.

You need to keep a few things in mind .........

1) Real estate is rarely bought/sold for cash in hand. Usually involves a long term loan to purchase and that means the price depends very much on interest rates. When rates decline the market price of property normally goes up because it's the amount of the payments the purchasers must make that determines what they can afford. The fact that market prices of real estate have declined in spite of the drop in interest rates means that in real terms the prices have crashed much more than at first might appear.

2) That you intend to hold (and not flip) the property means that you could ignore short term discrepencies. But you still should be taking long term into account. Why do you consider this property worth so much more than the market price? What it might have cost to build? That's over and done with. There was plenty of buying and building during the period befroe the crash based not on the then current proces but the expectation that prices would continue to increase. Deals where though unsound in the short run were thought to be good for the long run. Didn't work out that way.

The point here is that what's done is done. That they may have paid for this place at the top of the market, might have built at prices making sense then, does not affect that the place is worth now.

3) You appear to have a sense of what the current market price of this property should be. Have you tried an offer at/about this amount? Perhaps even a bit more? Half a year not sold and for all you know these people haven't yet had an offer even as much as the current market price. But note that if "stuck" in a negative equity situation they may be trying to hang in there waiting for a sucker to bail them out. We had a situation like this before we got this place though it wasn't negative equity but greed. We were renting a lovely place, not as much land as we would have liked but since adjoining a largish state forest (several squre miles) that would have been OK. But access was up a "road" over km long climbing about 200 meters (average 18 % grade). A serious matter in winter and I totalled one 4wd on it*. Well a place like that normally has that sort of thing factored into the market price, having to park at the bottom and walk up and back down many days of the winter. The owner decided to sell and at a price that might lure in a city sucker in summer. Succeeded in getting perhaps twice what proper market price would be.


* This wasn't carelessness with the weather but a surprise ice fog at lower elevation when I had the car at the top. Lovely weather as I started out but then bam, I was on a bobsled run bouncing back and forth between the plow banks unable to get the car to bite into them until finally up and over (not only steep but winding).

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default Re: Negitive equity?

Post by Chilli-head on 19th December 2011, 2:03 pm

I suppose I should warn you that I err on the side of being risk averse. But, putting on my business hat, and setting emotion to one side ...

GB wrote:
They are asking, depending on where I look on line, between 50 to 100 thousand above market value.
Its been on the market for 183 days.
[snip]
they are holding out for their asking price because the place is worth it

Presumably the market value is based on what other people have been willing to pay for similar properties, and is not just plucked out of the air. Stop and think about that. The place is not worth it, they are asking 50-100K above what it is worth, for something that is proving difficult to sell.

Almost certainly they are in the negative equity position as Mike suggests, and by paying their price they neatly transfer the problem to you. Now, you may say that you don't plan on selling any time soon, so negative equity does not matter. Nice in theory, but in my experience my plans have perhaps a 50% input in shaping my life - the other 50% is down to fate and luck; if you did need to sell, it would be you 183 days on and without a buyer ...

Now you might want to get on with your business, but think how much work you will put in to make 50-100K out of it. Then think over again whether you want to pay that much over the odds ...

I think I'd make them an offer, going no more than a tiny tad over market value, and leave them to think about it for a bit.
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Post by Mike on 19th December 2011, 2:40 pm

An additional consideration?

You say that you are judging their asking price to be 50-100K too much based upon comparable properties you see on line. Might I suggest in a situation like this you instead go around to realtors' offices, look in the paper local to this place, etc. Remember my story about that 25 acre place we were renting? Anybody local would understand what a klick up an average 18% grade would mean in winter but a city person, a flatlander, etc. might not. A place being advertised just on line might be seeking a sucker who would not know local conditions. You might discover it's worse than 50-100K above market.

And remember, it's local prices that matter since real estate is location, location, location.

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Post by GB on 19th December 2011, 11:16 pm

Well, had a good look round it and it wasnt calling to me. And while they were mortgage free they want the lump sum that a "proper" sale will bring.



Still looking but the first property still looks the best but he is trapped in a mortgage and is pricing his place above market value so my question is still valid Laughing



Negitive equity on either end is [You must be registered and logged in to see this image.]



Hmmmmm, my tool bar seems to have thrown away spell check so my errors have to stand Rolling Eyes

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Laugh and the world laughs with you, laugh hysterically, for no apparent reason, and they'll leave you alone!

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Post by Mike on 20th December 2011, 8:41 pm

The first place (that is in a negative equity situation)

The current asking price is irrelevant. In this situation you compare what the market price might be in the current market and the balance of the morgtage outstanding. The expectation is that the place will eventually be sold for whichever of these is higher (the bank stuck with the paper will normally bid that much at a foreclosure sale so as to have some control over the timing of when any loss hits their books).

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