Dick was an up and coming executive who had bought a large, attractive home in an upscale subdivision. He had put $45,000 of his savings down to reduce his payments, wiping out the bulk of his cash savings. Then he was downsized and couldn’t make his payments. Over the years, I have established a reputation for solving financial problems, so he called me.
Unlike so many people with financial problems who are in denial up to the point where they are going to lose their homes, Dick called me before there was any loan delinquency at all, He and his wife had put their heads together and squeezed their budget to the point that they were just $200 short of making their payments each month.
After reviewing a number of alternatives with them that would have severaly impacted their lifestyle, their childrens’ social lives, and Dick’s chances of being re-employed at his former level, they agreed that being able to remain in their home with payments that they could afford was more valuable to them than their $45,000 equity.
Here’s what I did: I bought their house for the loan balance. They agreed to lease the house for $200 per month less than their current payments for the next year. At the end of that time, if they wanted to remain in the house, the lease payments would rise to market rents.
On the other hand, if Dick found a job, I agreed to break the lease and let him go where employment took him.
Who got what? For a full year, or until he voluntarily moved out, Dick and his family would suffer no ill effects or change of lifestyle because of the loss of his job. Without the need to scramble for a living, Dick could concentrate on finding another executive position. In the meantime, any credit check made by a prospective employer would have shown that all his payments had been made on time as agreed.
From my standpoint, I paid $200 per month in negative cash flow on a fairly new upscale home with a $45,000 equity “going in” and with zero management effort or collection problems. Dick had a 825 FICO score and he had sacrificed his equity to protect it. There was little chance of any lease default.
So what happened? Dick found a job in California and moved out within the year and I sold the house for about $35,000 net over the loan balance.
The point I want to make here is that this deal wasn’t about money nearly so much as it was about giving Dick time to find a new job and to get back on his financial feet. At one point I asked him “What’s more important to you Dick, your family and future, or your equity?” To his credit he came up with the right answer and chose his family and future. If confronted with the same choices, wouldn’t you do the same?
