GentleFolk - for when you all have an idle moment:
This scenario kept running through my head in the scratcher the other night and I can’t work out why it can’t be true - or can it?
Consider - in an upmarket estate there are 4 neighbours, with identical houses. They all bought at the same time for €500k. As it happens they all work for say Dull Computers who are going through a rightsizing prior to decamping to the Urals. Luckily Mr A works in Finance, and Mr B works in Human Remains, so they have quietly written their own contracts and will be expensive to fire. Mr B may have to relocate closer to Bogwall Road so he has had his property valued. There’s been a 10% drop in the whole market recently but the market has become fairly orderly and property is selling, if priced reasonably. At €450k he’s a bit unhappy but as he’s in no rush to sell he’ll sit tight for now. So - the house is worth €450k, right?
Mr C and Mr D have had that meeting with Change Management Consultants where they were told about the “Joys of Career Change”, “Problems are Opportunities”, and “Welcome to Personal Growth Experience”. They invested their less than Golden Parachutes on an ill-advised joint venture called Dellightfully Different Tech featuring solar powered laptops in pastel shades with mahogany keytops and wooden mice only to find their target market well served by Apple. Alas their lenders Aggressive Investment Bank have foreclosed on both of them and manager Mr. Austin Minor has come out to meet a potential buyer, Mr Cash King. So what are the houses worth? Well something South of €450K obviously since we know B’s is worth that, and Austin will be anxious to sell.
However, and here’s the nub of the rambling story, D was prudent and only borrowed 80% ie €400k, whereas C borrowed 100% ie €500k. CK knows there a 2 identical houses on offer, and that AIB will want to offload, and offers AM a cheeky 50 grand under “market” for either, cash on the nail, today, take it or leave it. Now look at it from AM’s viewpoint - he could refuse it, of course. He could sell C’s gaff, but that would leave AIB short €100K and having to chase C for the balance with no leverage. Or - he could sell poor old D’s place - result AIB gets all its money, with no need to chase D further, and AM has one less property overhanging the local market which probably improves the sale price for C’s and B’s houses in time.
C and D both end up with nothing, but poor D has lost the €100K he had prudently saved up, whereas C has a debt of €100K or maybe less which may or may not be satisfied.
So - when prices were rising C was “right” to be further in debt than D, and with prices down he’s “right” too - which seems a conundrum.
However the main conundrum ( available from the Conundum Shopping Centre, by the way) to me seems to be that 2 identical houses have different values even though they are owned by the same bank. It doesn’t seem to matter whether AIB owns both of the foreclosed houses by the way - D gets screwed either way. It also doesn’t seem to matter if the market is falling or rising - once they’ve foreclosed it’s out of the D’s control, and as usual the more you owe them the better they treat you - or am I missing something?