The Economic Impact of High Risk Investing

My husband and I live in Miami. This was a hot real estate market just two years ago--white hot. The one bedroom condo that my husband had purchased just a couple years before doubled in value. Expecting our first child, we needed more room. Fortunately for us, real estate was moving fast and mortgage brokers were giddy with big commissions.

Unfortunately for us, when real estate is moving quickly, it's considered a sellers market. In a sellers market, eager buyers are competing for the same property making it difficult to get a contract much less a great deal. Pre-construction homes were selling out in hours with buyers waiting in line for days. Determined to find just the right house, at just the right price, we celebrated our daughter's first birthday just days after moving into our new home. Getting the mortgage was easy; it was outbidding the other buyers that proved to be difficult.

Then the market cooled. The amateur investors who had been driving the prices up panicked. Sell! Sell! Sell! It was like watching online investors dump everything when the stock market has a bad day. What some might call a housing slump, others viewed as a dive.

Amateur investors operated under the false assumption that the Miami real estate market was a sure win. Watching their friends and neighbors make money hand over fist (and lulled into false expectations by 30 minute real estate shows) amateur investors over extended themselves to cash in on the lucrative "real estate flip". Flipping is the practice of buying a property, making minimal upgrades and reselling for a profit. Flipping is also the term used when investors buy at pre-construction prices and then resell once the property is ready for occupation.

Many of these amateur real estate investors signed high, interest only loans to keep the payments low while they negotiated a quick turn over. Often they would sell to a new investor, who was confident the market would go even higher. Many of these individuals signed multiple mortgages with high risk lenders.

The flood of "for sale" signs signals a buyers market.

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