If those buildings are “useless”, how is the developer going to make money on it?
>Build for $1 mil.
>"This building is worth $2 mil! Give me a loan with it as collateral."
>Use the $2 mil to invest in something else.
Rinse and repeat. This is also the reason why CRE valuations have hardly fallen despite WFH et al. Everyone involved understands that valuations cannot fall, because more than the value of the buildings in question hangs in the balance.
I don’t think you thought this through. The building is only worth $2 mil if there are people paying rents for the cumulative similar units.
A bank will absolutely not give you a loan for $2 mil on a regular residential building unless there is supporting evidence for the market bearing in that. It’s far too much of a risk for the bank otherwise.
I think the gap in your mental model is that you think banks agree to owner valuations and fork money over without a second thought.
I think the gap in your mental model is that you think that these businesses have any scruples whatsoever. Banks will absolutely agree to improper valuations if it's to their strategic advantage. Realize that collateral has to keep its value over the length of the loan, but banks are lending based on the current/projected value of that collateral during the time that they expect to hold the loan. If they can clear the loan from their books before the collateral value drops, their risk is low; they will make that loan.
And I just explained how the risk is "low". The loan is not upside down when they sell it; they have nominal proof that it's "worth" $2 million (through dubious valuations, because it's in everyone's interests to pretend that that that valuation is solid (this is where scruples come in).
You also do not have to take my word for it since I cited one example of many where this actually happened.
Update your previously inaccurate world view, please.
The entity purchasing it has to think they can get the asking price for it.
The bank will not take the risk acquiring it unless they think they can actually sell it for that.
So if the bank thinks they can actually sell it for $2 million and it is selling for $2 million, you’ve just described a $2 million property.
What I’m telling you is that those buyers disappear at any large scale because buyers of buildings like that need ROI. It’s only in really hot markets where deep wallet flippers will tolerate taking a bet on a building that cannot generate revenue to support the note.
What you linked to is a rare case. It doesn’t happen at scale because the system doesn’t close.
>Build for $1 mil.
>"This building is worth $2 mil! Give me a loan with it as collateral."
>Use the $2 mil to invest in something else.
Rinse and repeat. This is also the reason why CRE valuations have hardly fallen despite WFH et al. Everyone involved understands that valuations cannot fall, because more than the value of the buildings in question hangs in the balance.