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Real Estate and Mortgage Crisis Part III: Ways Small Businesses Can Get Hurt
By Michael Taylor
While I don’t think most small businesses should be concerned about the housing slump and mortgage crisis, at Cedarcrest I have seen signs that some entrepreneurs will be hurt badly.
One indicator is the number of businesses for sale having to do with the mortgage crisis.
A quick search of one online aggregator of businesses for sale, for example, has 51 mortgage brokers, 13 title insurance companies, and 1 appraisal company for sale. I’ll go out on a limb and say there has been a significant disruption in these small businesses currently for sale as a result of the mortgage and housing slump nationwide.
And while I bet these small businesses could be bought “cheap,” it’s not time to get out your checkbook yet. The losses in certain small-business sectors such as these will be severe.
Another indication of the link between the crisis and small business is the situations in which our customers borrowed too much against their home.
One client of ours took out a third-mortgage about a year ago against his million-dollar condominium in a hot real estate market, and purchased a coffee shop with it.
He called me a few times last year to try to interest me in a joint-venture buying real estate in his hot market. Since Cedarcrest does not buy real estate I declined to join in.
Only a year later, the coffee shop is not making enough money, and he’s behind on the mortgage payments on his condo. Both the condominium and the coffee shop are for sale and my guess is the value of his condominium has dropped by at least 25% in the past year. I suspect he’ll lose any equity he’s put into both, just to pay off his debts.
For entrepreneurs who borrowed too much against their home and business on too little cash-flow, this slump could be devastating.
While I think more small businesses will fail than usual over the next year due to the mortgage and housing slump, I still believe the crisis will not be the cause so much as the symptom of other mistakes made by entrepreneurs.
What I mean specifically is that borrowing at a sub-prime rate of interest such as 14% is almost never a good idea. No matter what the environment for borrowing, few small businesses are in a position to profit while paying such high rates of interest. The crisis will not bring many small businesses down, but it will highlight why many small businesses do not make it.
Here’s another way of saying this: If you have to borrow at sub-prime rates, odds are you’re not going to make it as a small business entrepreneur. My advice is to go back to working on home ownership as step one, pay your debts on time, and become a prime borrower. Then, and only then, should you go to step two of running your own business.
In the next BizBox post, I mention a few small business opportunities to look for in the housing and mortgage slump.
Comments (0)November 28, 2007 12:19 PM
