Wretched excess homes, why?

In My Humble Opinion
1

Having never known anyone who was obscenely wealthy or otherwise overprivileged, I’ve always had something of a morbid fascination with our privileged elite who get a ton of money and just plain lose it all. I read last Sunday’s Doonesbury, and Jeff Redfern is going to be homeless unless he can make a huge adjustment to his lifestyle and way of thinking literally overnight, which looks unlikely. All because he splurged on a ridiculously extravagant pad with a big ol’ mortgage, an all-too-common real life pitfall. That’s when I got to thinking: Why is the too-luxurious home the downfall of so many music, screen, and (especially) sports stars?

I mean, think about it. If you’re the young, cocky, loaded, conspicuous consumption type, this is about the last thing in the world you want. Consider:

  1. Even the simplest payment plan requires attention and a certain amount of self-discipline. At the housing project I’m working at, we have the simplest plans imaginable (typically rent + a certain amount of dollars every month for 6 months; no interest or late fees), and you’d be amazed at how many tenants underpay, forget how much they need to pay, don’t save up enough money, or just plain ignore the plan. I can’t even imagine willingly locking myself into that kind of arrangement. Remembering to make my CPAC machine payment every month is hard enough.

  2. Big loans are a lot of work. I remember when my parents refinanced their mortgage…just reworking a contract that already existed…and it took ages. Starting one from scratch requires finding the professionals, getting all the necessary information, figuring out which rate to get, answering questions, and of course, forms, forms, forms. And even if the NFL #1 draft pick can hire someone to do all that tedious college graduate stuff for him, he still needs to read and sign documents, let the bank know how to contact him, work out how much he’s going to pay every month and how, make sure he knows what happens if he’s late, etc.

  3. A mortgage can end one of two ways: Pay it off, which takes a lot longer than the typical music or sports career, or miss a payment, whereupon the poor sap loses the house and gets NOTHING in return. I can’t even imagine a worse deal than this. H3 was a better deal than this. And this isn’t a secret; in fact, we recently had a massive housing crash triggered by these doomed contracts, not to mention lots and lots of well-publicized cautionary tales (what the hell was MC Hammer thinking?). Even setting aside the whole supporting-an-industry-that’s-pure-evil thing, who still thinks this is a good idea?

  4. The house comes with obligations, from routine stuff like washing dishes and doing laundry, to periodic maintenance, e.g. mow the lawn, unclog a drain, to occasional mishaps like a cockroach infestation or the refrigerator not working. The bigger the house, the more to take care of and the harder it is to keep track of everything. Remember how much of a pain it was the first time your parents made you vacuum the floor? Imagine doing 10 times the floor space. Thinking of hiring a housekeeper? That means going through ads, meeting and interviewing people, checking credentials, checking references, negotiating pay…

  5. A home is a private space. Private meaning that a lot of people aren’t going to see it. The whole point of conspicuous consumption is that it’s conspicuous. That’s why tricked-out cars, flashy jewelry, and expensive suits are popular with the more-money-than-sense crowd: they’re meant to be shown off. Except for maybe a brief mention on an obscure TV show, nobody’s going to go through a house just to admire it. We’re not that pathetic. J

I always thought that one of the advantages of being rich was that you didn’t have to bother with irritations like long-term debt. Buying something is one-and-done. Heck, a lot of these people buy cars and jewelry one time, things most of us need payment plans for, so why should a home be any different?

If I were interested in a nice home, I’d start with a nice, clean condominium, then seriously work the housing market for a good deal. Then, as soon as I had the cash, I’d buy it, paid in full on day one, and spend the next couple years deciding if it’s good enough. If not, repeat the process. Granted, selling a home is a lot of work, but nowhere near the constant, inescapable monthly burn that is a mortgage.

2

It is simple really. Most successful people think very highly of themselves. They think things are only going to get better.

They look for a home - they get an agent - the agent asks what they are looking for. When it comes to money - they give me the speech about - oh you can buy a house for 3 times your annual salary. They find the nicest house they can “afford”. Not always, and it depends where you live, but if you are in NYC or California - you can find lots of areas that would tap out almost any sport star.

Keep in mind sport and movie stars have already done what most people told them they couldn’t - they think they are invincible. At least that is how I see it.

Plenty of other people would be in the same situation, but you generally don’t get sidelined as a banker with a knee injury.

3

I am sympathetic to your reasoning, because unlike most people a really large house does not appeal to me, but most of your points do not apply to rich people. If you are really rich you need an accountant to handle your investments, and do your taxes. The marginal cost of having him do your mortgage stuff and make sure the bills are paid is going to be very small. Likewise you are going to have a housecleaner anyway, the marginal cost of keeping a bigger house clean is not that much.
The conspicuous consumption part is not for the general public but for your family and friends. You will probably be entertaining people you know and maybe having out of town guests. These are the people you will be wanting to impress. The main person you are impressing is yourself, every time you look at your house you will be proud to be the kind of person who owns a house like that.
Your plan of paying cash for a house is not very practical. To get a nice house you will have to pay some multiple of your yearly income. That means in order to pay cash you will have to save a large percentage of your income for years, while the price of the house you would like to buy is probably going to go up. If you get a mortgage you will still need to devote a large part of your income to it, but instead of living in a small condo you will be living in the house. If you miss a payment you do not automatically end up with nothing. It takes at least six months to be kicked out of a house, and you could get a new job in that time. Most people are able to build up significant equity in their house so unless you sell right after a price collapse, if you can’t afford the mortgage anymore you will be able to sell the house and still end up with some of your equity back.

4

Goof topic…I believe that these monster houses go by the name “McMansions”. Its about status and egos. However, its the same situation of Jay Gatsby-with his closets full of expensive English suits. You cannot possibly use all the space in these enormous houses-unless you have a family of 25 people.
In the current economy, many of these houses are being abandoned-they cost a fortune to heat, insure, and maintain. I wonder if these houses will wind up being chopped up into smaller apartment? This is what happened to a lot of old mansions in urban areas. Also, many of these Mcmansions were cheaply built-they will probably deteriorate quickly when the new owners fail to keep up the maintainance.

5

This thread seems to be less about McMansions and more about real mansions. McMansions (homes in the $500k-$1.5m range, estimate mine) pale in comparison to actual estates (>$5m) in terms of both up-front and ongoing (property tax, landscaping, housekeeping, etc.) costs.

As an example of what the OP is talking about, look at heavyweight boxer Evander Holyfield. His $14m mansion in Georgia was foreclosed upon after he was unable to meet payments on it, despite having made approximately $250m in his boxing career. Annual upkeep on the house was approximately $1m.

6

The reason is that, as with most people, these particular rich people do not know jack about money.

A study a little while ago found that 70% of lottery winners of a million or more were back at the same income level as before they won the lottery within 5 years. Link to a article.

The vast majority of rich people are not sports/movie stars or lottery winners. Most of them work hard, save and invest, spend less than they earn and keep cars and houses for a long time. In other words, the typical rich person doesn’t act like a stereotypical rich person. They use their money wisely.

Slee

7

You’ve never heard of being “house poor”? It’s actually pretty common. A lot of people haven’t had much experience buying a house, and if you listen to the wrong people, you can end up eating ramen noodles in your McMansion, or worse, getting foreclosed.

A few years ago, even reasonably well-equipped potential buyers were being told to buy houses with 5% down and an adjustable rate mortgage that “would never really go THAT high.”

8

I think there are a couple of reasons. If you become rich, and budget $3 million for a house, you can either buy a small house in a really overpriced area like Malibu or some parts of New York, or you can buy a very big house in a cheaper area.

When you are led around a big house by a realtor with $$$ flashing in her eyes, you’ll be given all the cool things you can do with the extra rooms. A ballroom for the parties you’ll be having. A screening room. A gigantic kitchen. And, bathrooms off all the bedrooms, big ones. Offices. A library. Maybe you’ll never actually use all this space, but you sure can visualize it.

9

I think of McMansions in terms of size, not price - say over 3,000 sq. ft. In my neighborhood $500K houses are anything but mansions - they are about 1500 sq ft. Someone a few blocks away did build a massive house that went for over million - that one I’d count as a McMansion.

10

You have a totally valid underlying point: it seems that many young people + money = often poor financial decisions. It isn’t unique to sports stars and mansions, I look at the cars some of my neighbors drive and think: are you kidding me? What kind of loan do you have to drive that Escalade? Sure, you got a great deal on a four-year old BMW 7 series, but can you really afford any repair bills?

But the points you bring up here aren’t that well thought out.

Paying a mortgage is no harder than paying rent, assuming you have the money. You set up an electronic fund transfer or write a check. If you are incapable of paying a mortgage, why is paying rent easier?

I’m not sure why big loans are more work than small ones. I got a mortgage many years ago, and it required a few days of work over a month or so. I refinanced a while back and it took the same. I don’t know if a big mortgage really requires a greater burden?

You don’t lose a house after missing one payment, but point taken. However, this applies to literally everyone who buys a house, not just rich people.

It took me a couple hours in a week to interview a few maid companies and hire one. Then I did nothing but pay them for the next many years. I literally never talked to the company again until I decided I no longer needed them.

There’s a new phenomenon called “entertaining people.” I’ve only read about it, but it seems to involve suggestions that people go to your “private space” and then you give them food and beverages. I read somewhere that these people then engage in conversation and recreational activities. Somebody at work mentioned a “pool party”; but I wasn’t sure if that was a newfangled dance, a billiards competition, or something else, but I think it’s a related concept. People with many friends seem to like “entertaining,” but I’m told introverts do not.

Relax. Many sports and entertainment stars also open restaurants to guarantee their financial future.

11

I agree with your general point, but it’s worth remembering that the very rich can delegate.

Does the CEO of your company hire the maids and fill out the tax forms? Of course not. The very rich have accountants to manage all of the finances, personal assistants to manage their schedule, travel arrangements and various errands, and household staff to do the stuff like interviewing maids. Life becomes more like being a VIP at a very nice hotel- you say what you want and someone else figures out how to make it happen.

Even the not-so-rich can make use of part time personal assistants. I use an online service to manage my service phone calls and other mundane tasks, and it is awesome.

12

The father of one of the girls my daughter rode with became very rich after an IPO. Rich enough that he was fighting the town about a helipad and rich enough that he bought a houseboat just to get the dock space. He doesn’t really qualify for this thread because he was old enough to be responsible, but he did like to buy lots of toys. And he delegated - to his wife. She had to be there to supervise the workmen doing construction. She had to call the repair shop when one of his toys broke. And she didn’t want to have an assistant, since she more or less wanted to live without people underfoot. Bruce Wayne had Alfred, but Alfreds are hard to come by.

13

I guess the most egregious example of this would be the Biltmore Estate (NC)-it was built by a Vanderbilt scion-cost a fortune, huge, and was never occupied.

14

The biltmore had the Vanderbilt family living in it until 1956. It is - I think - 5 times the size of the White House. The tour is awesome, but expensive as hell. It truly is amazing.

15

The speciality tours are nice to, I went on the Butler tour (basement mechanical areas and back of the house, and the architechs tour (out onto the balconies.) Biltmore is perhaps the ultimate exmple of what’s being talked about, Vanderbilt spent the lions share of his money building it and they eventually had to open it up to tours to get money to preserve it. Some of the reason might be the architect Hunt, who viewed it as his magnum opus, and perhaps pushed Vanderbilt from extremely extravagant to way over the top.

16

There are a few developments outside my hometown filled with what I consider to be classic McMansions. Here are a few characteristics of them:

They’re all large, as you say 3,000 sq ft and up.

They’re constructed rapidly in a subdivision by a developer - they’re part of a new development, outside the suburbs, often on land that was previously farmed. Because they’re new, there are very few if any large trees, but a lot of saplings being grown in yards.

They look remarkably similar, the developer having offered a few different slightly customizable floor plans. Besides a few architectural elements, like a dormer here, a gable there, and differences in the color and texture of the facade, they’re largely the same.

Their design and construction methods were optimized to produce a very large house at relatively low cost. They’re wood-frame with vinyl siding on the sides and back, with a (oftentimes faux) brick or stone facade. While the front is usually quite ornate, the sides and rear of the house are often a simple box with very few architectural features. Inside the walls are all drywall, no wood paneling. They basically look like a typical suburban house, just expanded 2-4X and outfitted with granite countertops and stainless steel appliances.

They often sit on lots that aren’t in proportion to the house; if I bought a 5,000 sq ft house, I’d want a few acres of land around it. To me they look like enormous houses with very average-sized backyards.

17

shrug

I have a older friend (late 40s when he bought, early 50s now) who bought way, way more house than he could afford. Wait, let me correct that. He bought the smallest and smallish (nice but old) house in a neighborhood he way, way couldn’t afford. Now, this small house (because of the neighborhood) still puts him in the “jumbo loan” category - it’s certainly no McMansion, it’s a small ranch house. But he paid a McMansion price for it.

Poor bastard got married (first time) in his late 40s. He was kinda pathetically lonely up until then. His wife is … ahem… status-aspirational? Don’t know a nicer euphemism than that. No way these two could ever afford this house, but because of her it HAD to be in that particular (read: highly wealthy) neighborhood because only POOR TRASH lived anywhere else. ahem.

We all advised him not to do it - hell, several of us told him flat out “Guy, you CANNOT afford this house. DO NOT BUY IT.”

And of course he bought right before the housing market crash, can’t remember exactly but it was 2006-2007. So the place lost like half its value almost immediately after he signed the check. Which, by the way, was for an interest-only mortgage until it adjusts early next year. He’s paid hundreds of thousands of dollars for nothing. Really, just rent to the bank.

sigh, what can you do? He’s fully controlled by an irrational woman, and he still won’t admit it. To his credit, he took on a second job just to make the mortgage payments (and he’s kept current), but two full jobs are killing him. He’s trying right now to short-sell the place. What he should do is just walk and let the bank foreclose (we’ve all told him this; his mother-in-law has a huge nice house that they all live in about 50% of the time anyways, just move in with her)

Every once in a while he starts ranting about how the “guvment” and the bankers “tricked” him into this, and I call him out immediately. No, guy, you were a spineless moron. You signed those papers. We all told you this would never work. Your wife…well, can’t say anything nice there. Just GTFO and never look back. His wife and him together make probably 4x annually what I do. He’s still killing himself with two jobs, a mortgage he could never hope to pay off, a smallish house (I paid about 1/3 the amount for my condo that has more sq. ft) in a stupid rich neighborhood with the dim hope the bank will accept his short-sale because I don’t know why.

sigh

Some people just don’t get basic math and finance. Or are blinded by a bit of affection from a SO, no matter how toxic and irrational they are. Who knows.

18

Because not everyone wants the same things you do. Why does anyone buy anything?

19

Wow, nice, already this many replies. Hey, good discussion, as always; thanks for reminding me from what I like about this place. (Providing a distraction from what I don’t like about this place, which I’m seeing an increasingly disturbing amount of lately, but that’s another thread).

Just so we’re perfectly clear, I’m talking specifically about extravagant houses, not fancy cars or boats or jewelry. Those are big hits, but generally not multimillion dollar ones, and they also don’t carry the risk of total loss.

WordMan - No, this is the first time I’ve actually heard that term. Definitely going to read up on it. Probably less common now post-housing meltdown, though.

Ravenman - 1. This one was pretty minor, actually. The biggest difference I can see is that mortgages have interest. Regardless, I’d think that your typical young gun would find “X dollars per month indefinitely” simpler than “making X amount of progress to paying off the debt”. Maybe, maybe not.
2. A few days of work over a month (and I’m assuming you had all your records and figures in order)? Sounds like a fair amount of work to me. Again, I’m talking young hotshots who’ve never done anything like this before, and most likely have never hired an accountant before, either.
3. Again, the bigger the unit, the bigger the burn. I’ve read the Evander Holyfield case, and it was truly mind-boggling. (Nb. $14 million was what he still owed on it.)
4. I’m glad it worked out so smoothly for you. It didn’t for my family (they let her go when she kept doing tasks they told her not to). Does an NBA prospect or breakout rapper know how to bring in a competent maintenance crew?
5. Okay, see, a pool (or jacuzzi), fine. Rec room, fine. Big-screen TV, nice big dining area, gymnasium, library, fine. Heck, my uncle, who’s far from a millionaire, has most of that right now. How many close friends does one person have? Thirty? Fifty? There really isn’t much point to a mansion that can comfortably accommodate several hundred. Rent out a hall if you need to host something that big. Heck, if you can negotiate a decent mortgage, that should be a piece of cake!

I just find it bizarre, that’s all. This seems like the pitfall that should be the easiest to avoid. I mean, I think it’s incredibly sad and pathetic (for everyone concerned) when a man fathers a bunch of illegitimate children and then goes broke due to child support payments. But, hey, sex is fun, and in the heat of the moment he’s generally not thinking of scheduling a vasectomy. Immature, but understandable. “Making it rain” at the nightclub? A one-time publicity stunt done at the spur of the moment. Gambling? Excitement, competition with other gamblers, speed and chills and thrills. A McMansion, that’s a case of having to spend a lot of time and effort to spend a ton of money, and something we’ve all seen time and time again to be a road to disaster. How much does the appeal have to be to go for it?

Like I said, morbid fascination. :slight_smile:

20

To your point of paying cash…
The net loss of doing so is your opportunity cost - interest charges.

So, if you can make 10% in the S&P 500 and are only paying 4% interest, then you are leaving that 6% on the table, compounded, over the life of the loan.

Applying the rule of 72, your investment of the capital that you have used to pay cash for the house would have grown nearly 7x over the life of the mortgage.