Buyers of second homes facing bankruptcy

June 01, 2008

SOME of the biggest losers in the real estate slump which has hit the US are not purchasers of mansions they could not afford.

They are buyers of second homes - or third ones, reported New York Times.

It is predicted that many of these people will lose their properties in foreclosures and could possibly end up bankrupt under the weight of sizable tax bills and higher interests.

Congress has granted some tax relief to people who lose their primary homes.

But for those who have fallen behind on paying for a getaway condo in Las Vegas, or a retirement home on the Florida coast, there is no such aid.

Bankruptcy lawyers say they are seeing a wave of foreclosures among owners of second homes in such a position.

Take Miss Lilia Garcia and husband, Jesus, who bought their dream house in Linden, California, for US$535,000 ($730,750) two years ago.

The couple financed the new home in part by taking out a bigger loan backed by their previous house in nearby Stockton.

They decided to hang onto the Stockton house and rent it out, believing that it would more than pay for itself and could be sold later to help pay for their two children's college education.

But the Garcias, who earn about US$65,000 a year, fell behind on their payments after their tenant moved out and the interest rate on their mortgage rose. Their monthly payments on the rental home rose to nearly US$2,700 a month, from less than US$1,000.

Said Miss Garcia, a medical assistant in a doctor's office: 'We wanted to make it an investment. I should've sold it.'


Inevitably, the Garcias will have to foreclose on their property - they have not paid the mortgages on either house for months and now rent a home.

They also discovered that they could expect a painful tax on the rental house.

Mr J Scott Bovitz, a bankruptcy lawyer in Los Angeles, says the problem is 'bad'.

'I've seen people not just buying properties to live in; they're buying properties to become mini-Donald Trumps,' he added.

Even if the economy improves, borrowers will face the double problem of foreclosure and then taxes, unless home prices begin to climb rapidly.

And no one sees that as likely.

The real estate boom in recent years prompted many to jump into the market. Some even bought multiple properties to sell for a quick profit.

The National Association of Realtors says there are now 7.5 million vacation homes in the US, about 10 per cent of the number of owner-occupied homes.