Friday, June 6, 2008

Ed McMahon Could Lose his House

I was just watching Larry King and saw Ed McMahon talking about his struggles to save his home from foreclosure. I am definitely not interested in the "celebrity" aspect of this (the guy apparently lives near Britney Spears, whom I would not care less about) and I am far too young to remember McMahon's prime, but I thought his situation presented a telling look at the state of real estate in the United States. The above article mentions he took on a $4.8 million mortgage in 2005 and the same day took another $300,000 loan on the house. It also mentioned he bought the house in the early 1990s and that the home is on the market for $6.25 million, though on Larry King, they said the home was listed for around $5.75 million. Also on Larry King, McMahon mentioned that the house had not sold during the 1.5 years it has been on the market. Undoubtedly, the trouble getting the home sold is a function of at least: a)the tiny market for multimillion-dollar houses at anytime b)the poor market for real estate nationwide and c)the especially poor market in California.

Initially when I saw the mortgage value of $4.8 million and the list price at $5.75, I wondered why they wouldn't just lower the price closer to 4.8 to be able to pay off the loan. However, I think there are a few reasons it's not that simple. First, you have to figure real estate commissions and transaction costs. I have little knowledge in this area, especially when it comes to celebrity mansions, but I understand the typical seller's commission is 6%. Unfortunately for the McMahon's, 6% of $5.75 million is a whopping $345,000, not to mention other (huge) closing costs. Also, there was no mention of the $300,000 loan on Larry King. Additionally, there is a decent chance of capital gains on the house in excess of $500,000 (the exemption for married couples), considering he bought it in the early 90s. Perhaps unlike some others, McMahon's cashflow troubles does not surprise me that much. It doesn't matter the person or the situation- everyone is quite capable of spending more than they earn or have in the bank. Couple that with a huge financial liability (like a $5.1 million one) backed by a recently depreciating and illiquid asset, and you can have financial disaster, no matter who you are.

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