Those were the days back in 2004. The housing boom in Las Vegas was at a fever pitch. Builders were holding lotteries to see who would gain the privilege of buying their homes. Speculators hit town like a swarm of locus buying up all the homes they could. There were only 2,500 used homes listed for sale on the Multiple Listing Service (MLS), and realtors complained that they couldn't get sellers to accept bids at listed prices.
But now over 20,000 homes are up for sale on MLS in Sin City and builders are giving away thousands of dollars in incentives to entice homebuyers to take the plunge. And for those who believed the way to riches was buying as many houses as possible with no money down, reality now bites.
Of course taking responsibility for one's actions is not the current American way. So instead of a trip to credit counseling, at least one Las Vegas couple has engaged legal counsel in suing a multi-tasking realtor/mortgage lender/leasing agent and his wife who allegedly caused their financial pain and suffering.
In a complaint filed recently in Clark County, Nevada, a husband and wife are suing a Las Vegas realtor and his wife for "fraud, deceit, misrepresentation, bad faith, and unfair dealings, as real estate professionals, mortgage brokers and failing to provide suitable renters for each of the properties."
According to the complaint, our would-be real estate moguls were earning a combined income of $60,000 a year at the time: the husband as a self-employed painter, the wife as a hairdresser. Back in October of 2004, with the Las Vegas real estate market rocking, as fate would have it, the hairdresser was doing a client's hair one day and mentioned that she was interested in real estate investing.
The client had just the person for her stylist to talk to: her husband happened to be a real estate salesman. The salesman urged the hairdresser to buy as many homes as she could with 100 percent financing using loans that require interest-only payments monthly.
The realtor projected that the homes would rise in value to generate equity of nearly $1,350,000 in five years, with very little risk. The novice investors had good credit so obtaining the loans would be no problem. In November of 2004, the painter and his wife purchased two properties and the following month they bought five more. In January 2005, they bought their dream home to live in.
The realtor Defendant sourced the property investments, acted as the real estate salesman, and also was the mortgage loan officer for each transaction. He also offered to find renters for all of the properties, and it turned out that his wife processed the mortgage applications: A true one-stop shop. Conveniently, the realtor also had engaged a compliant escrow officer to handle all of the escrows.
The complaint alleges that the "unsophisticated" Plaintiffs were rushed by the Defendants to close on the homes quickly and that the hairdresser was not able to review loan documents that she signed. However, during the boom, the Las Vegas couple evidently believed themselves to be savvy millionaires-to-be, and confident enough to refer family and friends to their new real estate guru, who in turn made 45 sales to these referrals.
With no renters in sight, the hairdresser and her husband had quickly racked up $2,623,500 in debt on the houses, between notes secured by the first and second trust deeds. The realtor actually covered the rent payments for several months, while he looked for tenants, but the investors had to cover the shortfall between debt service and rents: $5,772 per month, $772 more per month than the Plaintiffs earned at their two jobs. The hairdresser charged the shortfall on her credit cards.
All the financial pain and suffering would be worth it in five years when the value of the properties would total over $4.4 million according to the realtor. However, that would mean that these average, relatively new, Las Vegas tract homes, ranging in size from 1,386 square feet to 3,754 square feet would have to increase in value to $286 per square foot, more than $100 per square foot more than what Zillow.com currently values the homes. The real estate website values the homes collectively at just over $2.7 million or $177 per square foot. However, even that value may not hold. According to Las Vegas housing expert Dennis Smith, builders, like KB Home, are taking advantage of lower material and labor costs and selling new homes for $150 to $165 a square foot in new communities in the Las Vegas Valley.
The realtor eventually found renters for the properties, however, the investor couple were forced to evict five of the tenants for nonpayment. At least one renter was more interested in servicing a drug habit than paying the rent, and as one would expect, the evicted tenants were not kind to the properties.
When the painter and the hairdresser expressed frustration with their lack of cash flow, the realtor had the perfect solution, suggesting, "they should find a new occupation that would 'pay more and help them cover the negatives on the properties.'" It was recommend that the painter become a mortgage loan officer and that his wife sell real estate.
The hairdresser took the realtor's advice and after taking some real estate classes she realized "there were problems with the way the transactions were conducted." She also came to the conclusion that the realtor had made some healthy commissions from her purchases.
Evidently, it was only after extensive knowledge was gained while training to be a mortgage loan officer and studying for a real estate sales license that the now former hairdresser realized borrowing 100 per cent of the sales price to buy real estate that generated a $5,000-plus negative cash flow each month created "a potential for serious financial hardship, such as foreclosure or personal bankruptcy if they could not make their mortgage payments."
The "unsophisticated, unwary and unsuspecting Plaintiffs" claim that the realtor promised to cover all cash shortfalls until the expiration of the two-year pre-payment penalty for the loans and the properties could then be sold. The realtor Defendant claims, "he didn't promise them anything, and that hard times are all around."
It would be a stretch to describe the Las Vegas economy as "hard times." Gamers are now routinely winning a billion dollars each month from gamblers. Taxable sales in Nevada set a new record for the fiscal year ended June 30th, and over $30 billion in investment is either under construction or in the planning stages for the Las Vegas Strip.
Back in July of 2005, about the time finances were getting tight for our investor couple, Neil Barsky wrote in the online version of the Wall Street Journal: "The reality is this: There is no housing bubble in this country. Our strong housing market is a function of myriad factors with real economic underpinnings.…" He went on to write that it was a myth that speculators were driving home prices. "But bubbles happen when prices become unhinged from intrinsic value," Barsky wrote. "A house has utility. Rational people might be willing to pay more for a water view, or for living close to work, or for a larger lot. Such voluntary economic decisions are neither irrational nor exuberant."
How about buying eight houses that generate a negative cash flow exceeding your entire income? Mr. Barsky, there's a couple in Las Vegas you should meet.