Bad Investment? Losing The Million Dollar House, Literally

by Silicon Valley Blogger on 2008-05-2827

Last weekend, we got a chance to catch up with some family friends (Mr. and Mrs. B.) during a nice sit down dinner with our family. We got to swapping stories on real estate and business for a little bit, and it was as invigorating as we always expect it to be. The conversation, however ventured onto some awkward territory when we inquired about our friends’ latest real estate investment, which was their second home — a dream home at that, sitting right at the edge of the California coast. It was one of those houses that you always dreamed of having: no matter what age you are, you can’t help but feel the romantic danger of being in, much more owning a house that is perched perilously on the top of a majestic sea cliff.

When Investing In Your Dream House Turns Dangerous

The homeowner is an expert physicist who makes a good living studying ocean currents. He knows just enough about nature’s tomfoolery to convince himself that there is nothing remotely insane about buying a house squeezed in between Highway 1 and the Pacific Ocean. He thinks the prize is well worth the risk. To claim ownership over a home that lives with the constant crash of thunderous waves right against its foundation must be nothing short of spectacular and thrilling, so I can sort of understand the decisions that went behind the home’s purchase. Must have been a largely emotional decision, sprinkled with a bit of expert rocket scientist’s logic. ;)

The family consensus here, along with the opinions and reports of various property inspectors, pointed to the presumption that the house on the cliff had a limited shelf life, but long enough to survive the current generation’s lifetime. That was apparently good enough for Mr. and Mrs. B, who then forked over a million dollars to own this piece of paradise.

million dollar house, property, real estate

Mind you, this is a second home. And we’re talking about homeowners who aren’t people with money to throw around — just regular hard-working business people smack in their retirement years still working for the fun of it. They bought a house as an investment (a house on a sea cliff is highly valuable) and as something they clearly imagined enjoying for a while. It’s apparently tons of fun in the midst of bad weather. ;) It affords an adventure like no other when you’re sitting in a living room facing the ocean in the clutches of a raging storm. So who cares that the next door neighbor’s house caved in some time ago? The neighbor’s house was red-tagged for sometime before it became a casualty, and there were a lot of signs that pointed to its inescapable demise. But this house — the one Mr. and Mrs. B was eyeing — was in the clear… so far.

Fast forward to today. Unfortunately, no more than a few — a little more than a couple? — of years later, the inevitable has become reality. Last year alone, our family friends had ended up spending 6 figures to shore up the sea wall on one side. This year though, more bad news has come through; they’ve discovered more evidence of erosion right under the land their house is built upon.

Save My House, Please!

million dollar house, property, real estate

Sure, a few home-saving solutions were bandied around including doing more for the sea wall and moving the house physically to another location. But given that this house is tightly sandwiched between the highway and the sheer drop onto the sea, the possibility of moving it elsewhere is pretty much zilch. So really, options are running thin. In addition to the out of pocket expenses they’d already applied last year to their slowly sinking investment, Mr. and Mrs. B have decided to put in another $150,000 (estimated) to stabilize the property further. And forget insurance. Nothing covers this predicament.

Learning this, I’ve wondered: Is it worth it to keep this property around for an unknown length of time and whose fate is completely unguaranteed? Is this a case of throwing good money after bad? How would you handle high-risk properties? In my case, the answer is clear: I’d steer as far away from them as possible. Amazingly though, when it comes to high-risk business and investments, there are TONS of people who have and will continue to bite. There’s always a market for this sort of thing for the right price. When does the promise of opportunity turn into a demonstration of foolishness? In hindsight of course.

Back to our story. Looking upon this home as an investment, Mr. and Mrs. B are trying to recoup some costs by renting out the house to vacationers. You can rent this and many other similarly wonderful homes at a rate of $300 to $900 a night. But even with these rates, I’d posit that it would take way over 3,000 paid nights to make up for the million dollars sunk into the home — that is, of course, not counting straight up appreciation you’d expect from California beach property.

Nevertheless, when this house was newly purchased, the buzz around my family settled on a resounding question: WHY? Why shell out a million for what seemed like a high-risk property? One so conveniently situated in the middle of a disaster zone? To anyone considering such a purchase, you’d think it was a no-brainer.

But who knows… different people have different motives. Mr. B knows a lot more about the weather and the ocean than any one of us, and that’s for certain. Maybe he has faith that nature will indeed keep its claws away from his house a little while longer. Long enough so that he can enjoy his home and the exciting inclement weather for a little while longer before the sea and nature claims what it will.

I just don’t think I’d risk a million dollars for a bit of beach front property. Ever. I’m much more willing to spend $500 a night for that same privilege of staring out of a picture window into a sun-kissed water-blessed horizon. I’d enjoy that more since I won’t be worrying about masterminding the remedial intervention of my dream home. I’d rather not have the ugly reality of finances mar the fun of enjoying the fantasy experience of staying in such an esoteric home on occasion.

On another note, I can only marvel at how fortuitous it’s been for the previous homeowners of the house on the sea cliff. How lucky were they? They got their million bucks in the nick of time…

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 20 comments… read them below or add one }

thebaglady May 28, 2008 at 3:12 pm

Personally, I don’t understand why people want to live in dangerous areas just because it looks pretty. It is a very superficial endeavor. I would never buy a house near any water because I am paranoid about flooding and tsunamis. Ultimately not dying is more important than a view. If I want a view I can just buy an extra large HDTV and place it next to the window.

David Carter May 28, 2008 at 4:21 pm

I would put that sucker for sale and buy something a little less risky. I would have to have to keep shelling out cash just so my home doesn’t get destroyed. Those pictures are beautiful, I don’t know if they are of the real house or not, but I can see why someone would fall in love with that.

Curious Cat Economics Blog May 28, 2008 at 4:47 pm

I agree with you. One thing I really don’t like is when they tax us to payoff people that took crazy risks knowing no-one would insure them. Then they get their house destroyed and they want the government to bail them out. And because many are rich (even congressmen themselves) this has happened many times. Those that chose to take the reward of living there and the risk of losing their un-insurable investment should accept the consequences.

I would maybe buy one if I am given a winning lotter ticket for $50,000,000 by someone (since I wouldn’t buy one myself). But only crazy rich people that are willing to lose the money should take the risk.

Mrs. Micah May 28, 2008 at 6:11 pm

I’d also sell it and consider that eating the loss is probably cheaper in the long run than sticking with it. Plus it frees up the money for other kinds of real estate investing.

TC May 28, 2008 at 7:07 pm

I know you didn’t mean it like this, but this seemed to me like a parable for the current housing market in general.

jim May 29, 2008 at 5:40 am

Sometimes you fall in love and it isn’t about the financials. You’ve been working so long and so hard for the day you could own some ocean-view property, so you go for it only to find out you made a bad decision. A very bad and expensive decision. It’s clear that the decision was emotional, but now it’s become financial… I feel bad for them but they have to cut loose or sink with the ship.

Frugal Dad May 29, 2008 at 5:52 am

Gives new meaning to “living too close to the edge,” financially speaking! I’m with you – why sink that much investment into something for a second home when a few hundred dollars a night a couple times a year buys you the same view?

Dividend Growth Investor May 29, 2008 at 8:36 am

I strongly believe that there’s no rocket science behind investing in stocks/real estate. It’s all about diversification and risk management. That’s why people whose jobs are highly analytical like studying water currents, overcomplicate things and end up losing money.
If I were them however, I would still try to explore my options for as long as possible. I know it is a sunk cost, but people are not wired “economically” :-)

Zara May 30, 2008 at 4:37 am

In such cases I suppose it’s better to sell the property and get something else instead.

John Corey May 30, 2008 at 5:31 am

The purchase was not an investment. Far from it. This property will not produce income in any great amount and the upkeep will consume what ever it does produce.

The home is just that. It is a place for a family to live the dream. At the end of the day they will be dead and the home will likely become one with the ocean.

It is very similar to how most people choose someone to marry. You react emotionally and you do not study the financial benefits.

If the person was a real estate investor they would not be buying a second home They would focus on income producing property or other means to grow their wealth. Then they could afford to spend as much time as they like at any seaside location on the globe.

It was an emotional decision and they are spinning if they say it was an investment. Just smile and let them spin. Life is too short to get involved with all the bad decisions made by friends and family. That is why real estate investors do not turn to family members with no RE experience when they need sound RE advice.

I started investing in RE in CA back in 1983. You can do very well with RE but that is not the same as how people pick a home to live in.

MoneyBlogga May 30, 2008 at 8:33 am

A million dollars++ for a house at the beach? PASS. I’ve already seen what the marine air does to a house, never mind the fact that the ground is constantly shifting beneath us here in California.

Aside from the fact that I bore easily given my ADD, my solution to living right on the beach is a simple one. Buy an RV. Any time I feel like it, I can feel sand under my tootsies for weeks at a time. When I get bored of it, I go home. The changing scenery never fails to invigorate and inspire and my three weeks on the Gulf Coast were FAB. Sometimes I feel like I won the lottery and never told anybody lol. Works for me, gas prices and all – it’s still the cheapest and best way to rub shoulders at ritzy resorts and still keep moving to enjoy the full ambience and amenities of any given area. I plan to move into an RV full time here very soon. I did it once already with a young family for 2 years and we enjoyed every second of it.

Four Pillars May 30, 2008 at 1:30 pm

Very interesting scenario – thanks for writing about it.

This isn’t exactly on topic but I think that owning things like fancy sports cars etc are not worth the money – you are better to spend some silly amount of money just renting one every so often.

Mike

J May 31, 2008 at 12:40 pm

I don’t feel sorry for them. I certainly don’t wish them ill, but these people are stupid.

Excuse the bluntness, but people who make decisions like this are the same kind of people who wind up creating housing bubbles for the rest of us and then get a bailout on our dime.

My Dollar Plan May 31, 2008 at 2:05 pm

Wow! I would never consider a property that I couldn’t insure. Unfortunately, they will probably keep throwing money at it until it falls off the cliff. Too bad.

Bill@TheWealthHunter May 31, 2008 at 2:35 pm

I totally understand the emotional desire to own a beautiful home on a cliff overlooking the Pacific. I have friends who have owned such a home for over 30 years. And yes, they’ve had their fair share of incidents – hillside fires, mudslides, erosion. Yet, even with these incidents, they love their home. And I love going there and hanging out. But as an investment?? I wouldn’t spend a dime on such a home. It’s like burning your money. Literally. But, if they gave me their house and committed to paying all expenses for eternity? Mmmmm, I’d jump at that.

Hugo Drax June 1, 2008 at 8:49 pm

Life is not always about keeping every dime locked away so you could be buried with it. They knew the risks and if they get enjoyment out of it until they die then the investment is priceless.

Funny about Money July 8, 2008 at 8:08 am

Great galloping zot!

What gets into people? Just last weekend, some friends and I visited a home one of their neighbors is building in our state’s high plateau country. Very nice…and surrounded by chaparral, which grows right up to the walls of the house. It’s like taking up residence in the middle of a pool of gasoline!

To make matters more astonishing, another person who’s building nearby created a homeowner’s revolt by daring to clear the brush away from his site. The locals were outraged that anyone would want to cut out that beautiful manzanita (a plant evolved to need brushfire for seed germination!) and tinder-dry scrub. Spare me, lord!

As much as I also wish I could live in a house on the Pacific Ocean, I have to agree with other commenters: those folks are none too bright.

Austin Real Estate Broker July 11, 2008 at 11:36 pm

All I can say is WOW! Seems like the best investment would be to buy the land just inland from the house they bought and wait for your land to become seaside! I do wonder if homeowners insurance covers your house falling into the ocean? Even if it does, how can you be sure that you won’t be in the house, when it becomes a mobile home?

Joe

Property Tax Info July 29, 2010 at 6:05 am

I used to live in a house with a perfect view of the Pacific. It’s a dreamhouse but then when winter comes with strong powerful waves comes crashing your shoreline, almost hitting your house, it’s not that nice at all. It’s perfect half and bad half. However, it’s still all worth it on good weather, when you see the perfect sunrise and beautiful scenery and of course fresh fishes!

Walt Ballenberger October 4, 2010 at 2:20 pm

Unless you have a million or so you can blow off, this kind of risk isn’t worth it. Just to keep pouring more and more money into the place to try and rescue a bad situation and a bad decision seems almost crazy. As you said, what insurance company will write a policy on that house? Whether it is squeezing a house between Highway 1 and the ocean, or building on the side of a canyon that is in a fire danger or landslide area, people are too often temped to stretch reasonable limits for the sake of a good view. If they can afford the price of a total loss, fine, (and how many people can really say that?) but otherwise it would be best to forgo the great view and find something else.

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