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Greed: the reason why California is broke.
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Much has been in the news lately about
I began working as a Residential Real Estate Appraiser in 2004. I knew nothing about real estate at the time. However, I had a business background and common sense and what I saw going on did not make business sense.
When I took the courses to do appraisals the instructor said that the “ideal” real estate market has an educated buyer and an educated seller. Instead, those in the
It made no sense that someone who could barely afford the appraisal could afford to buy a home for $500,000 - $700,000. It also made no sense that homes could appreciate in value from $150,000 - $200,000 in 2000, to $500,000 - $700,000 in 2005 when the neighborhoods were exactly the same. The majority of these homes were 1400-2000 SF, which seemed like really high prices for an average neighborhood. The reason was the values were grossly inflated.
There is a level of corruption in any type of business, but I was shocked by the amount of it in real estate! What is more amazing is there appears to be no consequence for the predatory lenders who made these “deals” that are being defaulted on in record numbers. An appraiser simply reports the market and offers an opinion of value, not an opinion as to whether the borrower can afford the home they are buying. It’s supposed to be the job of those making the loan. However, their main concern is the commission they earn and the higher the loan amount, the higher their commission.
Another interesting trend I saw happening was that many people who sold these homes, “cashed out” and either left the state or left the country and returned to their country of origin. Then those who bought these homes put down little to no money and assumed huge mortgages which they would most likely not be able to afford when interest rates went up. This appeared to be a recipe for disaster, but when I said I thought the market would eventually go bust, others would accuse me of being “negative.”
Now the market has begun to crash as I predicted. No. I’m not psychic, just practical. There are numerous stories of people who have lost their homes. I’d like to share one example that particularly touched my heart; it epitomizes everything that is wrong with the philosophy of “greed is good.” Recently I did an appraisal for a loan modification for a couple with three kids who bought a 1400 SF condo in Sylmar for $375,000 at the top of the market. Their condo is now worth $115,000. Their real estate taxes are $4,800. They have not defaulted on their loan since their mortgage payment went up to $4,500/month. They are living on rice so they can make their payments.
Contrast that with another home I recently appraised for $1.9M in Pacific Palisades. The owners also have three children and just spent $450,000 basically tearing down the original home and building a much larger, highly upgraded, new home. Their property taxes are $1,800. Their home was not reassessed as it was considered a “remodel”-meaning they’d torn down everything except for one wall. This appears to be a pattern in many of the highest end homes I have appraised over the last five years: the owners of these homes often pay the least amount in property taxes, especially in comparison to the value of their homes.
This is the worst problem with the system in
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