Time for another investing post.
Famous, intelligent writers who do plenty of research to lend credibility to their romantic novels, both blew it with horrendous examples of how little they understand financing real estate, banking, lending, and borrowing.
1. First book. On finding a tenant for a commercial space: “They needed a big one [tenant] for the building. They would be losing thousands a year in interest alone once the final payments had all been made.” That doesn’t make sense.
This is a property three of the characters are developing. Presumably they have a loan to pay for the lot and the building. They need a tenant to cover those loan payments, which include principal and interest. When the payments have all been made, that’s it. The loan is paid off.
I’ve run several scenarious through my mind about what payments, for what, to whom, by whom. That sentence doesn’t make sense in any of the scenarios.
2. Second book. Mortgage underwater. This is easier to understand, but it, too, doesn’t make sense.
Our heroine, in desperate financial straits, wants to turn her parents’ (who have moved to Florida) decrepit old house in a Northern Michigan tourist town into a lovely B&B. Yes, I know, that already makes her a financial illiterate.
But get this: “In any event, the house needed a lot of work, and her parents were less than enthusiastic about pumping tens of thousands of dollars into a home that was already underwater on its mortgage.”
And, “To make matters worse, they’d gotten a letter from some lawyer last week that the bank had gone into bankruptcy and the mortgage had been sold to some private investor.” This is just wrong; so, so wrong.
Back to the first paragraph. If the elderly parents had had that place any length of time at all, the price they would be paying on the house would be pre-bubble.
The Midwest did not suffer as much during the mortgage crisis of 2007 until now. If the parents were keeping up their payments, there would be no way the mortgage would be in danger of defaulting. Therefore, their loan would have been a huge asset on the bank’s books.
Now, my dear lady authors, this is not rocket science. It is just addition and subtraction (3rd grade stuff) and a leetle bit of multiplication. A half-hour conversation with a loan offficer could have explained it all to you.
I certainly hope that you don’t have mortgages! And, for heaven’s sake, don’t borrow on the “equity,” which unscrupulous lenders may try to talk you into doing.
For a description of mortgage lending, see next post. And, no, I’m not going to name the writers!