Hot Condos, for just a letter

[Bob]

FYI all, Today's Wall Street Journal[19 May], front page section C1 discusses Gulf Coast condo speculators using secured or unsecured letters of credit to tie up condo units pre-construction instead of deposit/ down payment money. Now you can pay 1 to 3 percent of your deposit/down payment annually and control multiple condos pre-construction. Only thing interesting about this historically is that, the last time this practise was widely used [along with interest-only loans] was in the 1920s before the Depression.

[Advance The Man]

This is partially true. Typically a developer will require 20% down. They want 10% of this as cash and will accept the other 10% as a letter of credit. I've not seen a project yet where the developer would let you put nothing down and rely on a letter of credit for the full 20%.

[Bob]

I would say it's a wash. A 10% letter of credit is about as strong a pledge as the realtor's/ sales person's vision of future profits to a buyer. Most buyers will most likely walk from their down payments if values back up before construction is completed.

[Advance The Man]

Agreed. That's where the cards would come tumbling down. I'm not convinced that will happen though.

I would say it's a wash. A 10% letter of credit is about as strong a pledge as the realtor's/ sales person's vision of future profits to a buyer. Most buyers will most likely walk from their down payments if values back up before construction is completed.

[Bob]

I sure the demand will continue for the long term. I just hope we can walk the fine line between innovative financing to meet the challenges of price and craziness. Americans [God bless us] tend to have that "all in" attitude about everything. Our greatest strength is also our biggest weakness.