real estate margin calls
REAL ESTATE MARGIN CALLS by AL THOMAS Have you ever heard of a
real estate margin call? You know about stock market margin
calls. That's when you have bought more stock than you have
money and borrowed from your broker to buy extra shares. You
bought $10,000 of stock, but only have $5,000 in your account.
It is great as long as the shares continue to advance. If the
stock declines by a certain percentage the broker will call you
to send in a check to cover the shortage. Hence, a margin call.
If you don't send in the money he will sell out your position
and you will have a loss which you must pay. Many people send in
money and continue to do so if the stock declines. All
professional traders will tell you, "Never meet a margin call.
Sell." In real estate we all (most of us) have that thing called
a mortgage. We bought that house on margin. As long as you send
in the money every month you may remain in the house. Today
there are many people speculating in real estate as they did in
the stock market. Buy something and wait for the market to go up
and then sell. Just like buying AT&T stock at $40 and selling it
at $100. You could have done that. Today it is around $20.
Condominiums are being bought with a small deposit of five
percent or less before the ground is broken. Speculators will
sell as soon as the building is completed or before to another
speculator and he sells to another speculator until he runs out
of greater fools. It has been a speculator's dream and many have
made large sums doing it. It's like the kid's game of musical
chairs. Private individuals are re-mortgaging at larger amounts
to take out equity to spend on their home, invest in other real
estate as a speculator or for other purposes. They are
increasing their monthly payments and ARM rates are increasing.
This will work as long as the borrower continues to have income.
Many count on the incomes of both spouses. If and when the
economy slows down (and it seems to doing that now) it might be
difficult or impossible to meet the margin call, make the
mortgage payment. History has shown that there are 2 declining
economic periods within any 10 year period and there are longer
16 year cycles of good times and poor times. To maintain the
investment in property the mortgagee must keep up the payments.
It has been recorded in recent history that when the home values
fell below the mortgage amount many folks walked away. That is
not allowed any more as the new bankruptcy law does not forgive
mortgage obligations. The borrower must repay any loss to the
lending institution. Mortgage payments are like margin calls.
Failure to meet the call every month means the loss of your
equity. This is a margin call you will want to meet.