The upscale Chicago suburb of Hinsdale, Illinois has been hit hard by a real estate crisis.
There’s a 17-month inventory of unsold homes and some wealthy homeowners are in big financial trouble as their ARM’s readjust.
The average house sells for $1.15 million here so we’re not talking about the wrong side of the tracks. This is the essence of the definition of good location and many of these homeowners have good jobs and are prime borrowers.
According to Nick Carey, a reporter for Reuters, there are 3 kinds of Hinsdale borrowers who are in very deep trouble.
1. Abandoning homeowners
These are borrowers who are upside down in their mortgages. They owe more than their houses are worth, according to current market conditions. So some of them are simply walking away; carelessly throwing their credit ratings to the wind, just like a large number of sub-prime borrowers.
2. Real estate investors who can’t raise rents high enough
You can’t sit on a property for long if it isn’t bringing in enough income.
If your tenants can not pay the higher rents you need in order to meet the adjustable-rate-mortgage increases, you’re bad off.
Some of these landlords are also walking away and leaving their chances for a prosperous real estate investing career stuck in the mud.
3. Prime borrowers who will negotiate with lenders
This is the smartest group and it’s one reason why the rich get richer even when the chips are down.
When your back’s against the wall, negotiate.
This group will quietly work behind the scenes with the bank to do a short sale, which is probably their best bet during this phase of the crisis.
(A short sale involves the borrower selling the house for less than he owes the bank. The bank accepts this deal in order to prevent a foreclosure, which could cost the bank more in the long run).
So what does all this have to do with us?
There are all kinds of properties out there in trouble. We’ve got cafeteria style choices right now and it could get even better over the next year or two. Savvy real estate investors should buy smart, crunch the numbers, and never use any property as an ATM machine.