It's such a crazy situation that it highlights the stupidity of the California law. But DaDa's right. He signed a non-recourse loan, with the sole security being the house. It's not a loophole or complex business transaction. Simply a term of the loan as agreed (and probably drafted) by the bank. It's no wonder California real estate is in a funk. I'd overmortgage too.
They have done some great stuff over there in Lincoln. It's very nice. I have family in Linda and Marysville.
Actually, apparently this is not what he did. He signed a contract to pay back a loan, but without personal recourse, meaning, well...he has no personal recourse. If KMart instead was the 100% investor of a business that bought houses in California in hopes of leasing or flipping for gain, and borrowed money from banks for that business without personal recourse, and was here today with just this one house left and was potentially going to walk away, I think some of you would view it differently. You would be saying, well, he made a bad investment, but it's within his right to walk away. Similarly, when I buy public stock, I am doing so without taking on any personal recourse with regards to the company's liabilities, so if that company were to go bankrupt, I will have lost my equity, but won't be concerned about the creditors coming after me. The disconnect here seems to be the "personal mortgage" aspect of this for KMart. By all accounts this seems to have been his Sacramento home, and as his residence, we want to believe he has a moral imperative to pay back the mortgage he took on his house. He doesn't. And he apparently doesn't contractually, which is what really matters. He has already lost his equity in the house. Moreover, while in default, he still may not "walk" from the property, so he's potentially even doing way more than he contractually is required to do. The idea that many of you on here would go ahead and drop an extra couple hundred thousand or more if you were in a position to do so is somewhat laughable. I certainly wouldn't, and I'd guess most of you also wouldn't, if in the same situation.
Sounds like Martin and his lawyer put in for the short sale to wash their hands of a home that's lost considerable value, the bank is playing hardball because they don't have any incentive to let a millionaire walk away from a $1.9M loan (and dragging it out keeps him on the hook for more payments), and so Martin's been advised to put pressure on the bank by withholding payment. Market corrections! Fun for us all!
Unlike the personal lending situation in your post, we are talking about sophisticated parties represented by attorneys in a most likely heavily documented deal. Well-funded company limit their exposures to investments and from debt obligations all the time by, for example, forming subsidiaries/special purpose entities to borrow funds and engage in transactions. This enables the parent to "walk away" from a bad investment even if the parent has the money to pay.
From the article: His attorney says Martin has no intention of walking away from what he owes but is in a legal dispute with the lender as he pursues a short sale on the property. ______________ Having just gone through a short sale nightmare with my lender, I can attest to the incredible difficulty of getting them to respond to anything. They also try say one thing one week, and something else the next. I didn't default, I moved and put my house up for sale in December 2008. The very worst time. I kept paying the mortgage for a year plus having to pay for another place to live at the same time. After maxing out credit cards just trying to keep up, we had to do a short sale. Finally, a year later we got a buyer willing to pay $100,000 LESS than what was still owed on the house. I already lost all my equity by that time which was about $80,000 of my own money. After a nightmare of extortion threats from my lender and taking money out of my 401k which I didn't legally have to do, we finally closed in June. Then when the lender got the paperwork from the Title Company, they decided to change their mind and not accept it. Now they say I'm in default and owe them all those missed mortgage payments. It's a nightmare, people. Don't judge Kevin when you don't know the details of his situation.
Cash is King debt is dumb. I dont care how you want to slice it,liquid is always better. I dont finance anything and if i to go get 500k, they will give it to me without blinking. If you have it, spend it. All credit is saying you cant afford what you're buying.
Except for a little something the IRS calls a mortgage interest deduction for a residential mortgage.
Invest it for what? You can take those mortgage payments and invest that money. I'm not saying your dumb, i just think thats a dumb way of thinking and part of the reason people have problems. Its always long term thinking. The house may only be worth x now, but if its paid for,eventually it will get back to where it was or close to it. If its a house you feel like owning for the rest of your life,why sell?
Which, of course, is considerably less than the amount you pay the bank in interest every year. Why pay the bank $1,000 so you can get an extra $100 back on your tax return?
Incorrect. The only way you can lose your house in Texas is to be foreclosed on. You cannot be sued for your house which is what you what I think you are alluding to.
You're not factoring in opportunity cost. Let's say that the mortgage interest rate is 5% on a $200k house. If I feel like I can invest that $200k and earn greater than a 5% return, then it makes sense to take the mortgage and invest the $200k.
It's not about the tax return ... financially savvy people are more focused on investment returns than tax returns. The point is that instead of putting down all your cash on an asset that could lose considerable value over the next few years, put a small amount down and invest the rest. You're paying a ~5% interest rate on the balance. As long as you're a savvy enough investor, you should be able to beat that rate on your annualized investment returns easily especially when you have that type of capital on your hands. You don't even have to use the riskiest securities - just go buy muni bonds or something. Poor people worry about trying to get out of debt and stay debt free. Rich people use debt to get richer. It may sound weird but that's the way it is.
Mathematically, you are 100% correct. But to me, I'm more concerned about the RISK associated with carrying a mortgage. What if you lose your job? What if a medical emergency comes up? What if your investments tank? So many unpredictable things can happen over the term of a 30-year mortgage that can turn your mathematical equation upside down. I don't agree with this at all. My in-laws have a 7-figure net worth and they haven't borrowed money for anything since the Carter Administration. When he tells me that the way to become rich later on is to be debt-free, I'm listening to him...
Investments are generally liquid. If you have medical emergencies and need to dip into your investment account, that shouldn't be a problem. And financially savvy people generally keep a cushion of a few months worth of expenses in the bank. And how did they accumulate this 7-figure net worth? Any investing at all?
Buy house in cash -> Risks: Housing value drop -> Advantage/Rewards: No need to worry about monthly payments and interest Hikes and extra interest paid over 25-30 years(Which i think is usually more than the principle) -> Disadvantages: Less cash to invest. Buy house in mortgage -> Risk: Housing value drop -> Advantage: Can walk away in Martins' case. -> More risk/rewards: Cash investment might not return the % mortgage is, or even losing value (Market Crash in 08-09)
