Editor’s note: Sometimes it pays to learn from others, and in today’s real estate market lessons can come at a high price. This three-part series examines hurdles for homeowners facing foreclosure, buyers who are interested in buying those foreclosed homes, as well as options for standard borrowers looking to purchase a home. (Read Part 2, "Buyer beware: Foreclosure sales not for everyone," and Part 3, "Lenders still finding ways to finance home purchases, refis.")
Wendy had a plan to sell off one investment property a year in the Sacramento, Calif., area to help pay for her daughter’s college education. Kassondra, a painting contractor in Santa Cruz, Calif., put a lot of work into renovating the home she bought six years ago. Jeff, a single parent, bought an investment property in Des Moines that he planned to rent out. And Dave bought several properties in downtown Atlanta that he fixed up, with plans to sell or rent.
They share a predicament — all of them got in over their heads in the real estate market, and they are trying to find a way out. This journey toward foreclosure can be fraught with Catch-22s and tough decisions, they say.
A housing market slowdown, coupled with a credit crunch, have put the brakes on home sales in some market areas, which has led to an increase in foreclosures nationwide. Data company RealtyTrac reported this month that U.S. foreclosure activity grew 93.4 percent in July compared to the same month last year, to a rate of one foreclosure filing for every 693 households.
Dave Hafner, who had owned a blueprinting company in Atlanta, decided to try his hand at fixing and flipping homes in the Atlanta area. His first project was a home he purchased directly from a man he knew who got behind on mortgage payments. "That first one was a good experience," he said.
And then he met up with a man who specialized in buying abandoned houses and selling to others as fixer-uppers.
"I learned a lesson. There are certain areas of town you just don’t want to be in," Hafner said. While the homes seemed like a good deal at first, he hasn’t been able to sell them for the price he paid or rent them out for profit.
He purchased one of the homes for $125,000, and it sat on the market at $109,000 for six months. "I haven’t had a nibble on it," he said. He paid $150,000 for the other home but hasn’t been able to sell it for $136,000. "I can’t get anyone to even look at it," he said.
While the homes are not in a foreclosure process yet, Hafner said that he has been "making house payments with the bank’s money," using credit cards and borrowing to help pay the bills. "I’m trying to protect my credit as long as I can." He has also put his primary residence on the market.
Hafner said he believes there is a problem with inflated appraisals, as the properties he purchased appraised "for way more than they’re worth."
While he is investigating whether he could convert the properties for use as Section 8 rental housing, that will likely not pay the mortgage bills either and would only be a temporary fix, he said.
"I’ve got to get out from under the ones I’ve got. That’s the last thing I wanted to be was a landlord," he said. Hopefully the market will change and he’ll be able to sell the homes, he said.
Hafner said he realizes now the importance of knowing the neighborhood. He said other owners are also in a similar situation of trying to sell their investment properties. "You go up and down the street — there are for-sale signs and these houses are all empty."
He plans to continue to work in rehabbing and selling homes. "Hopefully I’ll be able to survive (this) and put what I’ve learned to use."
In Des Moines, Iowa, Jeff Madsen is trying to hold onto his primary residence and get out from under an investment property that is in foreclosure. "What I owe on the house is more than what the property value is worth," he said. "Everyone has told me there isn’t anything I can do unless I have money to pay the difference (in the value of the property)," he said.
Like Hafner, Madsen said he believes he overpaid for the investment property but didn’t realize it at the time. "I found out a lot of things since then," he said. "I got into something I didn’t really, truly know what was going on." He said he purchased the home from a then-licensed real estate professional who is no longer licensed in the state, and the man referred him to a California-based lender.
The troubles with the investment property could spill over to his primary residence, Hafner said. "My primary is on an ARM loan, and with that (investment) property going into foreclosure, I have to get this refinanced. But now my credit’s going to be messed up so nobody’s going to want to touch me. I’m just really stressed out on that. I was taking money from (my home) to try to save that one. Now, in turn, I’m getting into trouble with both of them."
He added, "My credit has dropped over 200 points since the beginning of the year. Not only is this affecting me, it’s going to affect my daughter." As a single parent, Hafner is worried about where he is going to live if both properties are foreclosed.
"I’m basically going to be financially destroyed. I don’t know where I and my daughter will be in the next six months," he said. "I’m caught between a rock and a hard place, trying to do everything I can to stop this from happening."
Hafner said he has exhausted all of his options, and he worries about how many others are facing foreclosure, too. "I know there are a lot of people here, too, who are experiencing it," he said. "I just don’t know where it’s going to go. The government is going to have to step in and make some adjustments. How can you stop someone from the ability to live somewhere and what’s stopping them is their credit?"
Kossandra Knight said she would like to keep her home that she bought six years ago in the Santa Cruz, Calif., area. But that is just wishful thinking. A painting contractor, Knight has worked to sell off several investment properties at a loss and is working with a real estate agent to complete a short sale on her primary residence. Job troubles and high monthly payments have put her into a foreclosure process.
"What are your choices?" she said. "The first thing you try to do when you start to go south is to use your credit cards to pay for things."
Knight, who has filed for Chapter 13 bankruptcy, said she ended up with a negative-amortization loan on her home and the payments quickly got out of control. She was drawn in by a "teaser" rate, she said, and a job loss wiped out her reserve.
"This was my very first purchase — my very first house. I put all kinds of capital improvements in it. I remodeled the kitchen, bathroom, (and) I landscaped. When you have to do a refi to save your butt, there’s no butt to save — my equity of $175,000 is gone now because of the market."
She said that a short sale on her home is her only option. Her home has been on the market, off and on, since October. She has owned two other investment properties, one of which she sold at a loss and the other through a short sale.
While Knight said she has had some good experiences with mortgage professionals, she also blames some of her current problems on lending practices. "Not every single lender out there that does creative financing is a predatory lender," she said. "I wouldn’t have been able to have a house if there wasn’t a creative way of getting me a house. All it takes is for one to go south and it messes with everybody else."
"You could easily call it the quiet poverty," she said of the rush of nationwide foreclosures. "It affects everybody. Nobody is coming out of this unscathed. It’s wiping out the market." She said she believes government intervention will ultimately be necessary to fix the financial mess.
"My entire savings was in my house — my future was in my house and now it’s gone," she said.
Knight recommends that homeowners build up a substantial reserve that can sustain them during times of hardship, such as the loss of a job or a death in the family. She also said that people should research their loans thoroughly.
"The bottom line is: Make sure you know the facts. Ask all of the questions until you’re well informed," she said. Knight also recommends purchasing mortgage insurance.
Wendy Shapiro, a resident in Roseville, Calif., said she purchased multiple investment properties after selling her home in San Francisco and moving out to the Sacramento area.
"I bought a fourplex in Red Bluff; I had $500,000 in the bank and a 700-plus credit score," she said. But her real estate investments have become a money pit. "Unfortunately, I put all my eggs in one basket. Now my daughter is going to college and I don’t know if I’ll be able to keep her there."
Shapiro, a nurse, said she had planned to gradually sell off the properties for a profit, but now she is faced with a decision on which properties to "walk away from," she said. "I am a single mom here working my butt off, and I thought I was doing the right thing."
Rental prices have dropped substantially in areas where she owns property, Shapiro said, as many investment properties are competing for rental income. "Rents have dropped everywhere because people who couldn’t sell houses are now trying to rent them. I can’t even sell one house," she said. Buyers are on the fence these days, she said, and the credit crunch isn’t helping out with sales.
"It’s just hell. Will I be able to sleep at night knowing I just walked away from $400,000 to $500,000 … and all my time?" she said.