This is one of my classic posts that I felt I needed to bring to the front of my blog. It shows that short sales aren't something new. This post was written in December of 2006. Enjoy!!!
| 12/15/2006 | Your home is your castle, not an ATM machine! | 97 | 13294 | 9381 |
Tomorrow, I'm placing a home on the market, that is going to require a short sale. Seems like I'm getting an awful lot of these lately. This is one where I just don't understand what some folks are thinking. Nice young family, who were first time homebuyers just about 2 years ago. They bought a great little house, new construction, and they only paid $135,000 for it in November of 2004.
This was right before our big increase in prices that happened in Poinciana in early 2005. So when I made my appointment with them, earlier this week, I assumed they would be in a pretty good equity position. Even if they had purchased with 100% financing, which they did, they would still be able to receive a sizeable amount of money at closing. Based on my preliminary analysis, the property is worth between $225,000 and $235,000. That's some real good appreciation for 25 months of ownership. After expenses they should be looking at around $70,000 to $75,000 in their pockets. That's a lot of money for a young family.
Well, when I met with them, I was shocked to find out they currently owe $225,000 on this house! How the heck did that happen? From what they told me, when they moved into the house they wanted to fix it up and furnish it real nice, so about six months after moving in, they refinanced and pulled out the equity that had built up when prices started skyrocketing.
They used this money to purchase the things they wanted. New furniture, TVs and all the other items that a young family think they need. What they didn't count on was hitting a financial bump in the road about 9 months later. But they weren't too concerned since they kept getting all these mailers from mortgage companies in the mail promising them more money.
The temptation, being too much, they decided to call one of the mortgage companies and have a salesman came out to see how he could "help" them. They said he was a real nice guy and he told them they could put a second mortgage on their house for $65,000. He was also nice enough to let them know, that the way houses are appreciating, that after a few months, they could refinance again and get rid of the second mortgage. He said "Don't worry about the high rate, once you refinance the payments will come back down to what you can afford. You can use the $65,000 to make payments in the meantime."
What a great guy! They can now get that new car they want and buy more nice things for their three young children. They told themselves, "It's not a big deal. We know we will get jobs real soon and then we can just refinance like the nice man said. This homeownership is really awesome! It's like having our very own ATM machine."
Fast forward to this week. I met with them and they are in dire straights. Husband just started work a couple of months ago and the wife has still not been able to find work, since she is too busy, taking care of three small children. They have enough money to make two more mortgage payments and then they are done.
So, tomorrow, I am placing the house on the market at $225,000 and I will be trying to negotiate a short sale.
These folks are in their late twenties. Instead of selling the house and using their, what would have been, $70,000 equity to purchase a better and bigger home for their children, they are now looking at possibly being foreclosed on and in the best case scenario, ruining their credit for years to come. It is sad but it's largely self inflicted.
They made a mistake and they know it. They're not bad people they were just weak in the face of easy money and instant gratification. Now they must pay the price. I hope I can get them through this with the least amount of stress possible. I hope they have learned a valuable lesson. I hope they move forward from this and are able to get it together. I hope all their new furniture looks good in their new apartment. I hope they don't read this post.
Moral of the story: Your home is your castle, not an ATM machine.
Reserved Parking For "The Lovely Wife"...TLW...ROAR!
Blog Boy...
Now see...It was already happening...Now it's just more intense and more often than we'd all like to see it happen.
P.S. I could have done better than that. Sorry :)
TLW...ROAR!
I remember this one. The classics never fade.
BB, I'm thinking that once we all recover from this market that at least most homeowners will take their personal finances a bit more seriously...things just went terribly wrong but as hard a lesson as this is, I think our economy will be better off in the future.
Smite away my loved one :)
Bryant- Like Lenn says, some people are meant to be renters and some people are meant to be homeowners. Some people just can not take on the responsibility of home ownership. Home ownership is a privalege not a right as many people think.
This is my biggest pet peeve; to use your home as an ATM machine. I can not tell you how many of these happened.
The latest one was the couple took out a second for 140K to buy a lot in the peak in Port St Lucie, and built a house.
Now the first on their first home is going to be paid, the second wants them to sign a promissory for 10% of the short because the lender is saying, you bought another house with our money.
This is only fair. The sellers should be elated. They just reduced their amount owed on their home they built by 140K. But the issue of entitlement comes up and they are not as happy as they could be if they would just accept responsibility. Zero interest, payments of only 120 per month for like 84 months. They can use this to rebuild their credit.
BB - This really sounds all too familiar, especially with young folks. I just hope they are learning from this experience. Are "LifeSavers" in order? Good Luck!
I think a lot of young folk just get all excited thinking they have a bunch of 'money' in their homes so what they hay....keep on refinancing and getting more and more and more...until there's zero..under zero and you get the picture.
What happened anyway?
It was so easy and the lenders were not concerned about the pay back then foreclosures were so small they just did it with out a second thought.
Yep, BB, far too many people in our area are also living in their ATMs and frustrated because their ATM is now "out of order" and has stopped dispensing cash. It's the same mentality as the old joke about the wife who argues that she can't be out of money in her checking account - she still has checks left! But this real-life issue is no joke. A lot of people are really hurting, and too many of them were talked into terrible things by a silver-tongued mortgage broker.
BB - well I remember this excellent post from before. Time has passed but the story for some has not changed. While I don;t know if this is true, I suspect there are a good number of folks who bought in the last few years who may be in the same boat.
BTW what WAS the outcome?
Jeff
Bryant, somewhere along the way people thought debt was good. A debtor is a slave to the lender. Don't they get that??
Too bad that we need to remind people about this!
Wow. My mind is going in 2 directions on this one. I resent the mortgage agent who encouraged these home owners. But I also can't believe how greedy people can be.
BB, I have the same question as Jeff, How did this one turn out? We'd like to hear "the rest of the story"
Bryant...OMG...where do you guys get these photos...I love it. I just listed a 2/1 in a bad part of downtown Redding that she owes $325,000 on and it will list for $150,000. I agree....how can this happen? Great article per usual. I try to learn....but alas...I'll never be a Broker Bryant or TLW...you rock!
I'm going to throw my hat into the "how did it turn out" ring too?
OK you'll love this follow up. I met with these folks and tried everything I could to NOT take the listing :) But I ended up taking it. I had it for about 30 days and then we withdrew it because......hold on now.....they found another lender to refinance them again!!!! It has recently been foreclosed on.
Of the few short sales I have been involved with lately, only 1 was because of an actual hardship in the way most of us would think - I lost my job, can't afford it, yada yada. The others were every single one because they refi'd 125% down the road and THEN had a change causing inaffordability. If they hadn't tapped their home, all of them would have sold at profit.
Live and learn, you gotta wonder about what is going through folks' minds.
BB- Thanks for the follow up. I know I asked for it, but I simply can't believe it! I wanted to think they are working their way back to firm footing. Oh well, I shoulda known better.
Like you said Bryant, worth re-posting. I have a couple of clients that have done this exact thing and they are wondering why people won't buy their overpriced home to bail them out of their misuse of their equity. Very timely.....should be required reading.
This is pretty cool! You're reblogging yourself!
Bryant,
Thanks for the re-post. This is a testament to the fact that the truth is always the same no matter what the circumstances. Great points!
Great post but unfortunately the banks made it very easy to turn a home into an ATM. It is something we will deal with for some time into the future!
Great post....love the title..that alone is hilarious..but then again it isn't is it because a lot of people are using them like this.
Wow, that is a great blog and thank you for bring it back. This was even before I joined Activerain and discovered the classic writings of Broker Bryant and that oh so sexy Bertha.
I remembered this blog when I first read it. I agree that houses cannot be used as ATM machines. In more positive ways then not, I am glad that Texas real estate market (especially those who had bought several years ago) has not been able to practise this. It is good for us. I cant imagine being in more trouble than we already are.
This is a great post. We know of a couple that refinanced every 6 months so that they could go on vacations, buy cars etc. Crazy.
Just read this article.
These people deserve what they are getting (and will get). They deserve no bailouts from me or other taxpayers. I saw these (types) of people live high off the hog for year off the phoney "equity" in their homes - as if they had hit the big slot machine. They bought Hummers, boats, and other "toys". Now it's time for them to pay for their mistakes (if no outright arrogance) and let those of us who lived within our means pay the "real" price of a home ... and not the inflated price that all these people caused in the market.