Over the last several years I have noticed that people are using their homes on Hilton Head like an ATM machine.  Every time they needed a little money they went to the bank and either took out a line of credit, 2nd mortgage, or refinanced. 

Recently I have had several people call me to appraise their home.  When I pulled it up on tax recrods I would notice that for 4 years in a row they had refinanced the house every year.  I asked myself, why would people refinance their house every year?  Then it hit me, it wasn’t that they were necessarily trying to get a better rate as much as they were trying to take money out and live off of their home. 

The problem with using your home as an ATM machine is that eventually the ATM machine runs dry.  You get to the point where you have a bad year and your house drops in value and the house is worth less than you owe on it so you cannot continue to draw out.  If you sell it you do not have the money to bring to the table to close.  Furthermore, if it is an investment property you will owe tax on it.

I recently met with some clients of mine that I had sold them a villa for $400,000 several years ago.  The villa is now worth around $800,000 and at one time was worth about $1.1 million; they owe $950,000 on it.  Since they paid $400,000 for the villa and it is worth $800,000 now they are going to have a $400,000 tax gain on it even though they are bringing money to the table to close the property – not  a good situation for them to be in.  The problem was, they kept drawing out to spend money on other investments like the stock market where they lost that money so they are between a rock and a hard place.

I think this all goes back to the right reasons to own real estate.  We own resort real estate because it is a great place to vacation and have fun.  Too many people used it as an investment vehicle.  It reminds me of the old country music song, “I love you for all the wrong reasons”.