During the hectic heyday of the real estate boom, many financial gurus touted the tenet of using “OPM” for investments.
Using “Other People’s Money” became standard practice of the day, with the theory being that as long as one did not use their own cash reserves, the downside risks were minimalized.
As it turns out, that was exactly the case. When push came to shove many “investors” simply threw up their hands and walked away. The “other people” took the brunt of the financial assault.
And while many love to portray the mortgage banks as the “Sheriff of Nottingham” and relish the notion of these institutions getting their “come-uppance,” the fact is that most of the paper was sold to various investors that ranged anywhere from mutual fund to 401Ks.
Bank executives are getting raises and bonuses. Security investors are losing their shirts.
If the market is to recover, there must be money available to lend.
I can’t help but wonder if the supply will be able to meet the demand.
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Richard, Now days OPM is hard to find. Most people are using it themselves.
I think that having more skin in the game has played a big part.
Yep, getting 103-105% was stupid. If you got behind, just walk away. There was no way you could sell for what you owed and besides you had nothing invested anyway.
Most who needed those loans couldn't handle even a time hiccup that comes with home ownership (HVAC failure, HW Tank failure) not to mention the big ticket items.
Bill...
IMHO that is where we need to be with our mindsets. Thanks.
Than...
You hit the nail on the head! More incentive to walk away than to hang in there! Thanks so much.
Some of those "investors" bought with little or no cash and with no way to pay. I had people pitching me property in Florida gaining 5% per month. All I had to go was sign the paperwork and I could buy a half-dozen condos. I didn't, of course, but there were people that did.
Now, we've gone too far in the other direction - not enough capital. I think we'll see money come back into the market but it'll be harder to get. Rightly so, I think.
Ricjard: OPM is another way of describing "leverage", right? We all need to remember that leverage works both ways, i.e. it can really help if things are going up, and really hurt if they're going down. Good post.
We still do a little OPM around here, but it's not like the early to late 90s. In those days, it was a common occurrence.
Bryan...
Yes, there is a need to keep the mortgage system working, even if it's going to hurt a little now. Thanks.
Phil...
Ah yes, leverage. Haven't heard that term used very much lately. Thanks so much!
Mike...
We don't see "sweat equity" so much these days, so we? Thanks!
Do other people have money? :) Very thought provoking post - thanks!
Richard, what goes down must come up - well usually. When it does it will be fun to watch how we could wind up back doing the same old ubre crazy things in the market.
I can remember when newbie real estate “investors” were encouraged to take cash advances on credit cards to put down payments on homes and flip them for a profit in order to pay the charge of within 30 days or getting their credit card statement in order to avoid additional interest charges. Now there is an investment strategy you don’t see any more.
Richard - we have always used other peoples money ..... the big difference is we knew we would have to pay it back and always did pay it back.
OPM has gone the way of OPP. The 15 minutes are up.
Good post, thanks for sharing it.
Richard,
I believe you already know that for any investment, leverage increases investment returns when the market appreciates and wipes them out fast when the market depreciates.
Very often "OPM" is taxpayer's money. FNMA and FHLMC (read us taxpayers) have incurred $140B (with a "B") in loses that should rightly be lenders and borrowers loses. Yes that includes all mortgage bond holders including pension funds, mutual funds and even individual retirees' savings.
Richard, most investors I know are cash buyers. They like owning the properties free and clear.
That's a thinker. I would like to know where 'other people' get their money. :) Maybe they'd just share with me.
It's a lot tougher to get that OPM these days, and some buyers are simply shocked at the increased documentation requirements.
We are just learning the significance of the letter O in OPM
I should be called instead GPM
Government money.
Our taxes are paying for it
Richard, I think private money is getting harder to find today. Investors aren't willing to take the risk they once did.
You always write short, easy to read posts with great content that makes you think! Kudos!
Richard: I think OPM is always part of the equation. It's just that people cannot usually finance a purchase 100% these days. Thanks for the post!
Hi Richard, There is always some type of excuse floating around as to why the banks are not lending. What is it this month?
Hi Richard...without OPM, it's hard for even 1st time home buyers to Buy,never mind investors.
Congratulations on your feature.
I remember a time it was possible to buy apartments and borrow 100% of the purchase price, and 18 months latter get a conventional loan. If the investor purchased correctly, and they were able to get 100%short term financing, they could be in the game with -0- in it! That's right, because the building would appraise for 25% more 18 months latter, the investor ended up having no $ in the game, just loans!!!
It's the same way others went busted, you have to be very careful if you are playing that!
GREAT BLOG!
Hi Richard, As usual yours is a well reasoned and articualted post. I have to believe that the amount of demand is relatively constant and the market will respond by meeting the cash needs of the buyers.
Everyday I have a conversation with clients about the whys, wheres, and hows of the past market and we just all shake our heads and try to do the best we can. I am so over this whole situation and someone needs to figure it out!
The days of using OPM seem to be alive and well here.. more than it should be.