My Lesson Learned: Simple Tips To Prevent You from Losing Your Shirt

Most sub-prime borrowers know the risk they are taking, but isn't the American dream about home ownership? Credit is the too-easy cure for the sub-prime borrower's eroded self-esteem.
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A flood almost took from me the first house I ever owned. It was in Boston -- no, not New Orleans -- and I saved it with the help of guidance from the federal government and a timely SBA loan to a beleaguered, unlikely landlord.

Almost twenty years ago, I wanted a small one-bedroom condo to call my own. I had a steady job and had saved enough of a down payment to buy something modest, but no lender would approve me, with my income, for the properties I really wanted.

My broker came up with the idea to buy a three family home and use the rental income for the approval. "Wise investors take risks," she said. I was planning to go to law school, so shouldn't I be savvy? I drank the Kool-Aid right up. It worked. I got approved. I was a landlord. I remember saying out loud, "If they are stupid enough to approve me for this loan when what I really wanted was a one bedroom condo, then I'll be stupid enough to do it." And thus, a first-time homebuyer-turned-landlord was born.

Then reality struck. I had to mow the lawn, lease the apartments, paint this 100-year-old wreck of a house, and fix the plumbing. I even tried renovating my own kitchen until a board snapped back and cracked me in the face. Did you know that those old homes were insulated with horsehair?

My storm windows were stolen the first month I owned the house. Who steals storm windows? A tenant sold crack out of one of my apartments and then skipped out on the lease. (The thing about Boston is that even the crack dealers wear whale belts so as a native New Yorker, it was hard to suss this out in advance.) After years of struggling with that monstrosity while I worked my way through law school, the place flooded in a huge storm in 1996. I remember where I was when I got the phone call from my plumber who had gone over to the house to check on things. I was floating in my car on the FDR Drive in New York City because the East River had overflowed its banks and I was waiting to be rescued. Yes, it was a bad day all around.

The news kept getting worse. All three of my oil tanks burst (one for each apartment), filling my basement with hundreds and hundreds of gallons of heating oil mixed with thousands of gallons of water five feet deep. The place was declared an environmental disaster area. LITERALLY. My tenants were evacuated and placed in hotels at my expense. One of them, graciously, left me a case of homemade beer (small consolation -- I remember sipping it lovingly, between crying jags).

My insurance company refused to cover the loss. I stood in front of my house during the ensuing blackout, paralyzed, unsure of what to do. Then it happened. People appeared out of nowhere, offering to take over my mortgage if I would give them the house. They were buzzing like flies. They went from flooded house to flooded house offering to step in and "help out." They explained they would get the benefit of the remaining equity in the house after the note was paid off and I would walk away free of the disaster. They had papers in hand. It didn't help that Massachusetts was in one of the worst real estate markets in its history. They worked me, telling me I couldn't handle this kind of thing. Better to get out before I drowned in the sludge.

They were right in a way. I was in way over my head. The loan, the tenants, the property maintenance were bad enough. The thousands of gallons of oil and water were even worse. I herniated two disks in my neck trying to move all of the wet garbage out of the basement. Wandering through the flooded city, I was looking for answers and stumbled upon a Federal Emergency Management Agency (FEMA) representative who said they might be able to help me. They wound up arranging a Small Business Administration loan, as I didn't qualify for an outright grant as a landlord. It wasn't free but I was saved.

FEMA helped me arrange the environmental cleanup and the renovations to the basement. The trick was I had to do most of the labor myself and that included using hundreds of large diaper like things to sop up the oil. I felt like I was a cormorant at the Exxon Valdez site.

My neck has never been the same but I kept my house thanks in large part to the SBA loan that I paid back every month with a smile on my face. I felt so incredibly grateful that someone was out there to offer me a helping hand, otherwise I would have lost my house.

But I didn't lose it. They didn't bail me out. They showed me a way out.

I finally sold the house, ten years after I bought it and shortly following the flood. I didn't make one penny, but I got my deposit back and I finally bought that one bedroom condo (actually it was a co-op) in New York City. I never looked back.

So... what's the up-shot?

That is, what's the advice for a potential borrower? Buyer beware, of course. I knew I shouldn't have agreed to buy a three-family house and become a landlord. I did it anyway. Why? Because someone told me I could! And I paid an enormous price. If your gut tells you not to do something, then don't do it!

Don't be seduced by easy credit, you will regret it in the morning or after the basement floods!

Most sub-prime borrowers know the risk they are taking, but isn't the American dream about home ownership? And if the dream doesn't come true, aren't we supposed to feel like failures? Credit is the too-easy cure for the sub-prime borrower's eroded self-esteem.

The reality is that a borrower will usually take a home loan offered by a lender, when they are afraid they won't be approved elsewhere with more favorable terms. The "can I afford it?" scenario usually doesn't work well when you have a mortgage professional telling you that you CAN afford it. So don't lenders/brokers sometimes try to jam you into a loan you can't afford? Well, that has become painfully clear to anyone who has been paying attention to the market.

Maybe all first time borrowers should call Suze Orman before taking a loan.

As for Fannie, Freddie, the Fed, Countrywide etc., I have plenty of thoughts about them but that is for another post...

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