Word for the Day: Priapism

Beth and Fabrizio (Fab) Faieta knew the ebb and flow of quirky real estate markets. Born and raised in the Boston area, they learned that to make money on property, you had to sit on it for years and be patient. They weren’t out to make a quick profit by “flipping” a home after owning it for only a few months. They were investors. They were trying to do the right thing by making money on real estate long term and pursuing a better life in the Sunshine State. They weren’t getting ahead by investing in their retirement plans. Massachusetts taxes ate up their incomes. They believed so much in the prospect of real estate that they cashed out both of their retirement plans when they were in their forties. All they had left was about $2,000 in an individual retirement account. They were entrepreneurs in the purest sense, striving for some measure of financial independence.

Arriving from the Boston area in 2004, they started investing in Florida homes as a way to create a nest egg and accumulate college savings for their two young daughters. Beth is attractive and talented, once a professional Shania Twain impressionist. Her business is selling hair extensions. Fab is a beefy, garrulous building tradesman. Both are devoted Red Sox fans. The Faietas were sold on Florida real estate after one of Fab’s friends showed up on their doorstep and extolled the virtues of the Naples area. So the balmy weather sealed the deal, and Fab went into business with him. As owners of three investment properties in the Boston area, the Faietas picked up in Florida where they left off in New England. They had been landlords since they met nearly a decade ago, so they were acquainted with the expenses and difficulties of rental ownership. They had also made good profits on the homes they sold. “We came to Florida to have a bit of an easier life without snow, I guess,” Beth told me. “And we invested here just as we did up north. We knew how to fix up homes and be excellent landlords.”

When I did my Florida research, I stayed in one of the five homes they had bought. A three-bedroom ranch with a two-car garage, it was fairly typical of entry-level homes in Florida. At the time I rented the house, it was listed for $395,000. At first, the price seemed inflated, but this was Florida at the end of the boom. Some one-third of properties in southwest Florida were bought by speculators at the height of the mania. Ordinary homes like these were overpriced and swamped a market already swimming in countless unsold properties when I was touring the state. The Bonita home, though, was bought at a relative bargain. The Faietas paid $260,000 for it in September 2004, which was fairly close to the average at the time for that kind of home in Florida.

When low interest rates unleashed a wave of rampant speculation throughout the country, the Faietas were aggressive in grabbing cheap financing. They landed a mortgage for the Bonita home at 4.62 percent, a rate not seen in a generation. Thanks to a Federal Reserve captained by “Maestro” Alan Greenspan, it was hoped that a deep recession could be averted after the stock market crash of 2000 and the tragedy of September 11, 2001. What happened to home prices could have been anticipated, yet the prospect was somehow ignored as middle-class Americans feasted on the cornucopia of low mortgage rates and the numerous property-related tax breaks. Following the freewheeling zeitgeist, the Faietas were quick to realize that real estate could be their ticket to accumulate wealth in a short period of time. They had no reason to believe otherwise. They weren’t going to make money in the stock market or investing in savings bonds. From 2001 through 2005, large-company stocks returned a miserable 0.54 percent. When you subtracted the inflation of 2.5 percent during that period, big stocks weren’t even worth the postage needed to open a brokerage account. Ultrasafe U.S. Treasury bills weren’t much better, yielding only about 2 percent during that time. The dot-com/ day-trading days were ancient history. Although stocks that invested in small companies and commercial real estate were doing well during the large-company swoon, most individual investors either eschewed them—seeing them as another huge stock market risk—or simply didn’t know about them. So when the housing market went into overdrive, millions who had been pining over their devastated 401(k)s were ready for action. “We purchased the Bonita house—and the others—thinking that we would like to keep them long term,” Beth said when I first asked why she and Fab invested in Florida real estate. “We’re not flippers.”

Climbing Ownership Costs During the Boom
As the Faietas discovered, buying and holding real estate isn’t like owning a stock. You can’t always control ownership expenses. When a wave of hurricanes blew across Florida in 2005, an aftershock of insurance premium increases hit the Sunshine State. The premium for the Bonita home went from a reasonable $999 a year to $1,407. For another home the Faietas owned in nearby Naples, the cost soared from $2,400 to $7,400. The insurance premiums were compounded by rising property prices, which meant higher assessed values—resulting in skyrocketing property-tax hikes.

When the Faietas bought the Bonita home, the annual tax bill was a bargain at $1,200. By the end of 2006, it had climbed to $3,768. Property taxes weren’t just rising in southwest Florida. Every home with higher values was subject to higher real estate taxes. Unless there is an assessment cap (as in places like California), assessors are free to track home markets.

The unintended consequence of the housing bubble was that it caused property-tax rates to soar by double digits in many places, making home ownership even more unaffordable. Newer homes in freshly developed areas usually got hit the hardest. Americans then got stung by a “sprawl” tax, which was perfectly legal yet never voted on nor anticipated. Spurbs where building was heaviest and home values the highest saw the greatest increases. Within three years, homes that once were bargains became financial burdens unless they were sold off. Those who thought they were getting the deal of a lifetime courtesy of low mortgage rates got caught in the cul-de-sac syndrome: They borrowed more than they could really afford, moved farther out from central cities, and gambled on home appreciation. Developers, elected officials, bankers, and Wall Street suffered from the same malady. They too refused to believe that these investments would ever sour. Although this thinking had been prevalent for generations, it escalated into a mass hysteria during the boom years.

By early 2007, blindsided by soaring ownership costs, the Faietas had slashed the prices on their homes. They cut the Bonita home’s listing price by $50,000. There were no takers as more than ten thousand properties glutted the southwest Florida market. Although they had previously been able to sell on their own, this time the Faietas hired a real estate agent, whose commission would cut into their profits. The boom days were a distant memory, a sharp contrast to 2004, when, the Faietas recalled, “we had to put in offers on the same day or the home was gone.”

As I prepared to leave the Faietas’ Bonita home, local real estate broker Douglas Brunner told me he was selling homes at 20 to 33 percent discounts. A year later, when I checked in with Beth, the Faietas still hadn’t sold their homes and were borrowing heavily on their credit cards to keep their heads above water. The Bonita home’s listing price was now $279,900, but they were still able to rent it out. Taxes on the home had eased somewhat, to $3,000, but the Faietas owed $12,500 in taxes for a lot and home in Naples and a duplex in Cape Coral. Taxes on their own home soared to $7,600. Insurance premiums had dropped, though their total bill was almost $8,000 for all of their properties. A new Florida property-tax law offered them little relief.

“It seems I can’t stop talking about our troubles with our home,” Beth wrote me in early 2008, adding that their real estate woes had put intense pressure on their marriage. They fought constantly over what to do. “It’s very stressful for us to be in the position we’re in. We haven’t sold anything and I fear our credit score will soon be going south. People aren’t into the ‘little upgrade brings more value’ idea right now. It’s a shame they don’t see the big picture. We don’t even have the Naples home listed with a realtor right now because they need a guarantee that they would make their commission at the short sale price [selling it for less than the mortgaged value]. I’ve listed it on Zillow and Craigslist for $399,900. But we owe more than that on it.”

The Faietas’ housing woes didn’t stop with those two homes. A duplex they owned in Cape Coral, where they live, was fully rented, although netting $600 less than their expenses for the unit. “The problem is, we bought it in the summer of ’06 when things were priced at their highest, so we can’t refinance that one,” Beth said. Like many who availed themselves of low rates when they became available, the Faietas had multiple mortgages on their properties. On their duplex, they had one 8.25 percent loan and another at 13 percent. They spent $25,000 remodeling the duplex, and it was worth $50,000 less than what they owed. The saving grace was that the house they lived in was financed with an 8.25 percent fixed-rate mortgage. Expenses on all five properties tripled in the time they have owned them, and by 2008 they could barely afford to pay half of their mortgages.

“We have always tried to invest for our kids’ futures. We have never tried to flip. We actually liked being landlords. We are doing better this year than last with our businesses, but every cent is going to toward our bills. I’m really tired of it and have decided to stop paying a few and stop stressing out. It’s just hard to decide which ones. Once we sell a few of them [houses], we’re going to bank our money for a while until we can buy the home we want to live in permanently and then think about our next step. I only hope we don’t ruin the excellent credit we used to have. Some days there is $32 in our account, and some days enough to pay most of our bills, but we’re making sure we can afford groceries and gas first.”