Ducks In A Tub

Taking life's adventures one day at a time.

Monday, November 20, 2006

Chapter 4: The House

Here it is. The story of mistakes made and lessons learned. I am talking about the house that we recently left and has caused us such trouble. We closed escrow today, so the story is mostly finished. There are still some consequences for our rash behavior, but I won’t be able to explain those until tax time. I guess I’d better start at the beginning…

When we found out that I was pregnant a mere 2 ½ months after The Talker was born, we were quite nervous because of how close in age our children would be. Our condo had two bedrooms and I was quite sure that we needed to have three bedrooms to comfortably fit ourselves and two babies. The lazy part of me said that it would be too much hassle to deal with two kids in the same room when they are still at an age to need naps. We started to look for a house. The county where we lived was quite expensive, so we expanded our search to the next county over. After a couple months of searching I found my dream house. It was a pleasant 4 bedroom house on a half-acre lot in a quiet cul-de-sac. I could see us spending many, many years raising our family in this ideal home. We placed an offer of $605,000 (a real deal for Southern California!) and the offer was accepted.

As escrow progressed, there were problems with our loan. We had decided not to sell the condo. Instead, we deeded it into a land trust with my aunt. Basically, she was going to take over the payments while renting the place out for a few years, then sell it at a profit and we would receive our portion of the proceeds. It was a good plan, except that having two mortgages on our credit was no easy task. We had to jump through all sorts of hoops in order to get the new bank to approve the loan on the house. The first plan for financing failed, then the second plan failed, and we were finally approved by our “Plan C” lender. We should have seen the red flags. The loan that we wound up getting had a higher interest rate (almost sub-prime) and the payment was $4000 per month. That is a lot of money, but keep in mind that, at the time, my husband was collecting his short-term guaranteed paychecks grossing $15,000 a month.

We were short-sighted and naïve. Somehow, we got it into our heads that, once we were in the house, we would re-finance the loan to a better rate and everything would be fine. We closed escrow in August 2005 and everything started off great. We got settled quite comfortably. I bought new furniture and curtains, had the cottage cheese scraped off the ceilings, and we even painted a couple rooms. In fact, I was over-zealous in my home-making efforts and I wound up getting pre-term labor and had to go on bed rest for the last couple months of my pregnancy.

We made an attempt to re-finance the house and it did not work, so we were stuck with our high payment loan. After a few months, the paycheck took a huge hit and we started to take money out of our savings every month in order to pay the mortgage.

As I wrote in Chapter 3, H lost his job in January 2006. We saw this as a sign to get out while we still could. In an effort to save money and hope to sell the house for a better price, we placed an ad that we were selling the house by owner. H used his creative skills to develop a great flyer and we spent the last two weeks of my pregnancy calling realtors, visiting open houses and offices, and spreading the word that we had a house we wanted to sell and we would be happy to pay a buyer’s commission. We were not trying to make any money off the house, we just wanted to sell it and break even. Like most people who try to sell by owner, we finally broke down and hired a realtor. In the two months that he worked for us, hardly anyone came by to see the house.

Our next door neighbor was interested in buying the house for her son to live in, but she was only offering $550,000, which would leave us with a loan balance of $50,000. That’s when H realized that we were going about this all wrong. It was time to ask the bank for a short sale. A short sale is when the bank accepts less money than they are owed. Basically, we send a bunch of paperwork into the bank trying to prove to them that we are in financial difficulty and cannot make our mortgage payment. When someone makes an offer on the house, the bank reviews the offer and decides whether or not to take it. We did all of our part, but the next door neighbor, for all sorts of personal (and dysfunctional) reasons did not hold up her end. She has been dubbed by us as “the crazy neighbor” because of this incident.

It was the end of March. Two months had passed since we first tried to sell the house. We fired our realtor because we became impatient. We moved in April, and we made a huge decision. On May 1, 2006, we did not pay our mortgage. Those $4000 a month payments were draining our savings account and we had a choice. We could either keep paying the mortgage until we had no money left and risk that the house still had not sold, or we could stop paying and hope the bank accepted a short sale offer before they took the house to auction. With two babies, it was much more important to us to have emergency money on hand, so we chose the latter.

You can debate the morality of this decision (I sure did!) but it was the best way to keep our family’s finances somewhat secure.

We have left that house vacant since April and we hired a new realtor to try and sell it. There were a couple offers made on the house, but none of them were suitable to the bank. Meanwhile, in August the bank filed notice of default on our loan. We were starting to think we might suffer a foreclosure on our credit. By California law, the bank has to wait at least 90 days to file a notice of default and then at least another 90 days to take a house to auction.

Finally, about 2 months ago we received a good offer, the bank approved it, and we entered escrow. When the time came to do the home inspection, there were some problems that came up (likely the result of sitting vacant for several months). The buyer changed his offer to a lower amount and the bank did not re-approve it. We were quite worried. However, it was also about this time that a new buyer came into the picture. This person is a contractor and did not mind doing the work that the house needed. He offered $550,000 and the bank approved.

After a series of bumps during the course of escrow (including $1600 of termite damage repair and $6000 septic work that the bank agreed to pay for) we are finally done. The loan funded last Friday and it is being recorded in the county today. We are free of the house. (And it only cost us $4000 to bring the property taxes up to date.) And not a moment too soon! We went to the house one last time over the weekend and there was a notice taped to the front door. The bank was planning to auction the house on December 12.

So now we have to repair 6 months of delinquent payments on our credit, but that it not nearly as bad as a full-blown foreclosure that could stay with us for years.

We no longer own the House of Learning, but it will be with us for a few more months. See, the bank does not do a short sale without repercussions. After realtor commissions and all costs are paid, the bank is taking a $120,000 loss. By California law, we are going to receive a 1099 from the bank at the end of this year and we will be responsible to the IRS for the taxes on this money. They see it as our gain and we will have to pay up. BUT, there are ways of proving hardship and insolvency, so we will see. That part of the story does not have an ending yet.

Actually, we consider ourselves as getting off easy. California law also states that if a house is re-financed and then goes into foreclosure, then, in addition to having tax penalties, the bank can also sue the owner for the remainder of the loan…and they will win their judgment every time. Thankfully, our attempt to re-finance the house failed and we are only stuck with the tax issues.

After such a difficult experience I am quite convinced that I will never want to own another house again! Or, at least, that I will pay closer attention to the red flags and not jump into a situation I can’t handle. Maybe one day the time will be right…but that time is not now!

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  • At 1:51 PM, Blogger BeachMama said…

    Wow, that is really a crazy story! I am sorry you had to go through any of it, but at least you have learned a few things from this process. Hopefully if you are able or want to buy again, you will watch those flags.

    Glad it is finally sold for you.


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