Spec house troubles = bank woes

I’m just back from viewing a spec house that local bank has gained control of. It was planned, I’m told, as a high 7 million sale but was available for what the bank’s owed: a little more than half that. I have clients interested in that kind of math so off I went  to check it out. Someone’s going to lose here, big.

The street this house sits on is a good one but like some boys, streets can come to a bad end. This one does, and the house is at that end, pressed up against the highway with enough ambient noise to drown out any nearby leaf blowers, if that’s a consideration. The building site is really a bathtub, scraped out below the original grade, and is approached by a narrow, steep driveway that wends its way through a swamp. There’s a Tobacco Road thing going on, with cheap, nasty houses on either side, complete with back yard dumps for unwanted household detritus. Inside, from what I could see, there is an undersized kitchen with an even smaller “family room”, and a dining room that can accommodate a friendly family of four. The place was locked so I couldn’t see upstairs but I imagine the same lack of design was executed there, too.

This house is not worth the $4 million the bank’s owed. I would recommend it at $2 million, I guess, and, if someone really wanted this location, maybe $2.5, but that’s it. I’m sure there’s been far more money sunk in here than that, between land and construction costs, but it shouldn’t have been. I understand how a builder could let his optimism override his good sense; how could a local bank be so blind?


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5 responses to “Spec house troubles = bank woes

  1. CEA

    My understanding is the bankers did not go to look at the houses.

    They sent appraisers – whose job it was to “make the numbers work” – or just took the builder’s word for it.

    It is called “no due diligence” – the same thing that torpedoed Madoff investors (no down years?), individuals (millions for a 2,000 sq ft home in California?), and hedge funds (sure, P/E’s can break 30 and not show a “toppy” market).

    • christopherfountain

      But CEA, a local bank, with local people, should know better. Why discount local knowledge, if its available? On the other hand, maybe these banks just use Zillow and save money. In front.

  2. anonymous

    Foolish builder, banker; just need a foolish buyer to solve the equation

    Location*3, right?

  3. CEA

    I grew friendly with the mortgage guy from our big-bank who did our house. WHen we were buying a couple of years ago, he was so busy he wouldn’t return calls for days, or he’d return them late at night, or 7am, etc. He would tell us that he could work until 10 pm every night, easily (but didn’t, as his wife would kill him).

    It was a crazy time (as I’m sure you recall!) and it went from “I’ll check all the houses” to “I can skip this one, I know the guy” to “I’ll just check out one house this week”.

  4. Anonymous

    People should check into why Hudson City Bank subsidized so many of these spec houses…