The recent sale of a Hampton's home listed originally for $150 million - that sold for about 47% less, revealed a startling stat: Even after the sale, the owner owed another $15 million or so to the banks....
Yes, big real estate owners have for years purposefully over-valued their properties, with the full participation of some appraisers and bankers/lenders who love earning interest off borrowed money, till things get messy of course and then use these extreme valuations to borrow against this asset.
We are seeing this piggy-bank mentality play out in the commercial sector right now: an investor buys a building, dolls up the facade or lobby and raises rents dramatically, or the rent market spikes, possibly too far, too fast, and everyone assumes this will last forever and continue rising. This much higher rent roll implies a much higher building valuation allowing the owner to go to a lender to draw out a big chunk of capital to use elsewhere or to pay off other debts.
While many exaggerated valuations are based on elevated rent rolls, it is possible that this Hampton's house had an elevated valuation based on the massive rentals you get in the Hamptons (in the Summer of course!). When things turn sour and rents fall, or it is revealed at the time of sale that the valuation was grossly exaggerated, some assets sell for less than what is owed to the lenders and losses are incurred by the banks.
Some assets can devalue as interest rates rise and their rental returns diminish. Bank losses are priced into what you and I have to pay at banks often in the form of fees, so yes, this impacts everyone. Properties that sell at a loss under duress can often sell at below-market value, thereby negatively impacting the appraised values of surrounding properties. Massive defaults can lead to government/taxpayer paid for bailouts to prevent contagion.
If you want an insight into the mindset of some of the people who do this on a regular basis, simply listen closely to the words of finance author, influencer and social media star Robert Kiyosaki who recently made headlines with his philosophy about debt: “If I go bust, the bank goes bust. Not my problem." And there you have it!
