It’s not a typical occurrence when someone who feeds their family by selling real estate writes something negative about the real estate business. We work with some excellent lenders and the following is a criticism of another company that we don’t generally work with. Prior to the recent closing of one of my overnight rental property listings I was reviewing the closing statement and saw something that is becoming more and more common.

The buyer was purchasing the Gatlinburg area rental cabin via a combination or 80/20 loan. This means that they were not only obtaining a typical loan for 80% of the property’s value but were at the same time also getting a second mortgage for the remaining 20% of the purchase price. This means of course that the buyer was borrowing what would normally be a down payment therefore not putting any money down. Additionally the contract called for the seller to pay the buyer’s closing costs and this was also properly reflected on the closing statement. The obvious result of this combination of multiple loans and seller paid closing costs is that the buyer has NOTHING invested in the purchase, not even any closing costs. While real estate investments here in the Smokies can be very successful it is not a good idea to ask any investment property to fund its total purchase price, (and the closing costs) from rental income.

If the rental property doesn’t deliver the desired income to the buyer they have very little reason not to default on their loans. Unlike being foreclosed on a property in their home town, there is no embarrassment back home in losing a property several hundred miles in the Smokies. With no social reason not to default in this type situation we could see lots of foreclosures in the future if rental incomes don’t hit these buyers very optimistic projections.

Speaking of projections we strongly caution buyers of investment properties here that it is very easy for real estate agents (and rental agencies) to project rental incomes without regard to what a property is really producing. A projection is meaningless and buyers should always look for actual results or at the very least what a rental company is generating for similar properties.

If we continue to see a lot of these package or 80/20 loans and wildly optimistic rental projections the result could very well be a large number of foreclosures down the road. Wise buyers should only borrow what the property can reasonably be expected to generate. For professional advice regarding investment properties here please contact our office. We have specialized in vacation rental properties for several years and know the market very well. We will even tell you when NOT to purchase a property which most real estate agents simply will NOT do.