Friday, May 1, 2009

When Real Estate Is A Liability: The Movie

I’ve previously posted about how real estate values can fall close to zero here and here, and the importance of completing projects here. This video of new homes being demolished at the direction of the foreclosing bank takes the concept to a whole new level:

This is not as crazy as it appears when you know the bank’s side of the story, available on this post from Vision Victory Manifesto (also the video source). An excerpt:

“Our only option is to either proceed with putting more than a million bucks into the land, which we’ve already taken a huge hit on and lost a lot of money, or, we tear down the houses,” Smith [Guaranty Bank official, Real Estate Officer Dean Smith] said.

He said the builder put up the homes before completing the site improvements and failed to have enough money to finish roads, walls, and other improvements that bring the community into code.

“Everything just fell apart at that point and we can’t sell homes that are not up to code,” Smith said.

He said the city of Victorville fined the bank once because the home are out of code and would have faced daily fines if Guaranty didn’t do something with the vacant houses.

“There are still substantial dollars that need to be put into the land before the city of Victorville will give certificates of occupancy on the houses and the bank isn’t willing to put forward that amount of money,” Smith said.

If the bank was just looking at the cost of finishing the houses, it probably would have made sense to do so. But, when you have to put in roads and other site improvements too, that probably tipped the scales in favor of demolition. Obviously, it’s really bad lending practice to advance funds for house construction and not have enough in the budget to build the roads to the houses.

Another factor was that, in the bank’s view, it would be at least five years before the market recovers to the point the houses would sell. That’s believable, given the market is Victorville. The video mentions other homes being demolished in Temecula, which is also a distant exurb:


More on the problems exurbs are experiencing here, here, here, and here. Neither the video nor post identifies an exact location of the homes being demolished, but here’s an image of the crossroads mentioned:


The combination of exurb market, fringe location, and poor construction loan administration will result in losses in this kind of market.