My personal family's upcoming foreclosure and how it happened

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Subprime JD's picture
Subprime JD
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Posts: 562
My personal family's upcoming foreclosure and how it happened

Quick background:

 

My father owned 3 very successful fast food/diner establishments in the greater Los Angeles area. Over the years his wealth grew and he accumulated more commercial properties, some he rents out, others he bought at low prices and barely pays much in property taxes but are undeveloped. In late 1998 he purchased 3 properties, right before the crazy real estate frenzy. He saw the property values SKYROCKET. For example, a 3.5 acre commercial property (undeveloped) off of a major highway he purchased for $250,000 in 1998, in 2005 he was getting offers for 2.5 million!!!!! Thats 10x what he bought it for. Back then i was 22, but i realized that a crazy bubble was brewing. I was always a skeptic, with the media, with school, with the church, with everything. I looked at the charts of RE prices and saw them go up parabolic. I told my dad it was time to sell just ONE OF THE THREE PROPERTIES and to take profits. He refused and said i never sell property.

In 2006 my father built a restaurant in Lake Elsinore, California, the foreclosure capital of the world. It cost us at least 2.5 million to construct. In addition, due to the brainwashing/convincing of my older brother (USC business school grad) they went out and purchased TWO HOMES , roughly 2300 sq feet, for the PEAK OF THE BUBBLE PRICES OF 420,000 AND 405,000. On top of that, my dad, also with the constant bombardment from my brother (bubble market moron) took out a home equity line of credit of 770,000 and purchased a 10 acre property out by Palm Springs. They were ecstatic, claiming that it would by worth 5 million in a few years. I told them you guys are nuts, this thing is going to blow, get out NOW, just sell ONE FU*KING property. They wouldnt listen. My brother, being a USC grad arrogant credit brainwashed young in his 20s had my fathers multimillion dollar backing and acted with reckless behavior. My father, seeing his net worth SKYROCKET, became arrogant as well.

 

Fast forward to 2007. The new restaurant in Lake Elsinore opens, and doesnt make a profit at all, ever. It is losing about 8000 a month and has been ever since. The property market CRASHED HORRENDOUSLY in the Lake Elsinore area, and the two homes we bought for 400000 have neighboring homes going for 205k, 220k. No joke. We pay roughly 130,000 in property taxes every year. The mortgage on the house is an insane 1.5 million. Yes, the home was basically paid off before my stupid brother graduated from USC. The other three restaurants are holding up strong, but sales are down 15-25% depending on the month.

 

So yes, my family bought 2 homes and a 10 acre piece of property in the desert (off interstate 10) and will be worth alot someday...who knows when. We bought at the peak. I yelled and screamed so many times for my dad to sell just one comm property at the peak, we could have had a easy 3 million in the bank. But no, they were greedy. Now we are stuck with a losing restaurant, 3 mortgages, crazy property taxes. We used to make at least 50,000 a month income, now we are broke. When we do dump the house we will be able to save 150,000 a year so were not going to be starving. Plus we have tons of ASSets so it could be worse. Its just sad watching the house my dad worked so hard for go in foreclosure becuase of his greed and my brothers USC business school bubble head arrogance. We havent stopped paying yet, but we really dont have much of a choice. They (dad and bro) refuse to sell ANY property. They just dont know when to cut their losses.

NLP's picture
NLP
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Re: My personal family's upcoming foreclosure and how it ...

As a chamber of commerce executive director in the IE I can verify that your family is not alone.  Business owners everyday are wondering what to do now that sales are slowing to a crawl.  They have done as your family has and sunk home equity lines of credit into their businesses figuring RE values were going to go uo forever and now cannot qualify to refinance.  I had one business owner tell me just this morning she can't even qualify for a Best Buy credit card and has never experienced such rejection. 

Recently I attended the IE Economic Forum Breakfast which featured local econ guru Dr. John Husing as a speaker.  Dr. Husing clearly stated we are in the down leg of a "U" shaped recession.  He stated until the housing market corrects itself by price adjustment, decrease the volume of housing inventory, and put construction jobs back to work, the IE is in DEEP trouble.  Curiously enough, not one word of his dire prediction appeared in my newspaper.

There is rampant disconnect in the Inland Empire about had BAD IT REALLY IS.  One local chamber of commerce had a fund raising event-- a contest to design the best custom dog house and auction it off --- while folks are losing homes left and right.  Let's design Fido a doggy mansion while the contractor up the street is trying to figure out how to make payroll or the state is going broke in the next 50 days or your neighbor dodges creditors.  

I sincerely wish the best to you.

cmartenson's picture
cmartenson
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Re: My personal family's upcoming foreclosure and how it ...

Bearmarkettrader,

I want to thank you for that personal and gripping tale.  Sorry it is one of woe.  It is also very common, and painfully ordinary and unnecessary.  But that's how bubble work - they are much more psychological than economic or financial.

If I were you, I would do whatever it takes to get my father and brother to read and heed the lessons in this article by Robert Schiller (who is one I would trust implicitly and explicitly to understand real estate better than anyone else, frankly):

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.

But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.

There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years.

Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower?

Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.

Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.

(Source)

As I also tried to make clear in the Crash Course chapter on Bubbles, these burstings tend to be symmetrical and last for as many years as it took them to develop.  Frustratingly, they will have false dawns along the way that only serve to drag their participants in deeper. 

The mechanism goes like this:

  1. Prices go down, players feel trapped.
  2. Prices rise again in a false dawn, players wait to "get even"
  3. (a) Prices never get whole again before heading down, players wait it out and remain stuck or (b) prices return and players feel vindicated and get the greed rush again and wait to make a killing.  Prices then fall again.
  4. Now that they are trapped a second time, shame and recriminations mount and reasoning with the players is now harder than it was before.
  5. Finally, after being crushed beyond repair, capitulation finally happens, lives are ruined, and smart people begin to emerge from the woodwork to buy bargains that finally make economic sense/

 

SagerXX's picture
SagerXX
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Posts: 2219
Re: My personal family's upcoming foreclosure and how it ...

 Bearmarket:  Sorry for your travails, man.  I've been blowing the whistle w/my Mom & family but either they are not willing to hear any of it ("it's just a market correction") or they don't have enough trust in the info I have to make any serious moves to protect themselves.  Your story is harsh, and cognitive dissonance is a drag -- and being the only person in the figurative room who sees that the house is on fire is even worse.  But you're not alone.  Not writing this to "cheer you up" (in your situation I wouldn't know how to find the bright side) but it seems to me this points to the problem of "How do we help others prepare...when they're unwilling to prepare?"

I hope you have the wherewithal to at least be preparing yourself -- and to do what you can for your family even if they're ignoring your good advice thus far.  Maybe your POV will penetrate before long.  

Viva -- Sager

Subprime JD's picture
Subprime JD
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Posts: 562
Re: My personal family's upcoming foreclosure and how it ...

The primary residence with the 1.5 million dollar loan is in Yorba Linda, was appraised at 1.9 million at the time of the HELOC. Can you believe the rampant speculation on the part of my dad and brother? They are in effect, the board of directors, ceo, and chairman of the family business. Who the hell takes out 750k loan to buy a 10 acre lot in Desert Hot Springs, on the assumption that a "profitable" new restaurant would foot the mortgage? These two acted using assumption based on assumption. The money losing restaurant is on the 15 freeway and central avenue exit (highway 74). You should check out that intersection, there is a Costco, Lowes, Staples, Target, Home Depot, Petco, a zillion other restaurants such as Chilis, Lonestar SteakHouse, Del Taco, Panda Express, CoffeeBean, IHOP, Weinersnitzel, mom and pop stores, retailers, the whole bubble 9 yards. All of these business jumped in the area in expectation of hundreds and thousands of new homes to be built with a growing population. It was like watching Sim City the area was getting built so quickly. Now everything has completely stopped. No more construction, BestBuy bailed out, the "projected" movie theater also said no thanks. Half of the office space buildings are brand new and completely empty. The neighborhoods look like a movie set as there are 3-4 foreclosed homes in a row at times. Speculators are starting to come back and pick up the firesales but no one is moving in, perhaps some renters. It surely is amazing being in the epicenter of the housing boom. I watched this bubble grow, pop, and explode month by month. And for all the energy experts out there, check this out. In the summer months the ELECTRICITY BILL REACHES AS HIGH AS $4,000 A MONTH!! And im talking about a 4000 sq ft building here. With sales as bad as 12,000 a week, were just getting clobbered here. A good weekly sales figure for a comparable restaurant is 24-27k a week, so 12K is just murder. Lake Elsinore, California is a hot hot place in the summer. I wonder how all the underwater homeowners are dealing with the electricty bill. perhaps they dont turn it on anymore.

investorzzo's picture
investorzzo
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Re: My personal family's upcoming foreclosure and how it ...

From NPR on 6-9-09 Economy Podcast.

Stated that Obama's program (making home affordable) to help some 5 to 7 million homeowners who face foreclosure, isn't working. So far the new program has helped just 17,000 people. Todays news is the month of May over 300,000 lost their homes. I know, because I'm still fighting foreclosure.

http://makinghomeaffordable.gov/

jerrydon10's picture
jerrydon10
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Posts: 442
Re: My personal family's upcoming foreclosure and how it ...

Bear,

That is a sad story indeed from your perspective. You have me curious about the restaurant off the 15 freeway as I have managed and owned multiple restaurants.

Is that restaurant being professionally managed? Is there an assistant manager back there to watch every plate of food that comes out (food quality)? Are prices competitive? Is it just that too much initial capital was invested in that the amount of business generated cannot possibly keep up with the note (fixed cost problem)? Or is it food costs or labor costs killing it off. All can be overcome and all is not lost, but it might take a reinvestment.

Maybe now that your Dad and Brother have suffered some losses, they can be awoken?

EndGamePlayer's picture
EndGamePlayer
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Posts: 546
Re: My personal family's upcoming foreclosure and how it ...

Understandably, business is slow to a crawl and the housing bubble burst. But I don't get it - where are all those people from foreclosures living? how are they getting food?

Here's another thing I do not get - IF the poopulation is growing (according to that HOME movie) to 9 BILLION in 15 years - where are all the prospective buyers world-wide? Bubbles are based on demand - so where did the demand go and how could an economy who's population is growing not need a place to live? I thought the Japanese market went sour when it was reported kids no longer wanted to move out and get their own place (they wanted to buy electronic toys instead). But we still have people needing places to live here.

We're struggling here too but not yet fighting foreclosure, but there are some months we only pay the interest on our home loan and they seem ok with that. I agrued down the taxes and insurance to 1/5 the price. We've never had to do that even though we have a seasonal business - enough came in to last through winters.

So are we going to see communal living like in the 70s?

End Game Player.

 

investorzzo's picture
investorzzo
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
Re: My personal family's upcoming foreclosure and how it ...

Rentals, Fema camps? Flu pandemic. It won't be pretty........

Food, water, Guns, Gold, skills.......

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