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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Tuesday, December 08, 2009

Land Contract: A Great Alternative When A Traditional Mortgage Isn't An Option

No one understands the current state of the U.S. housing market more than the citizens of California, Florida, Illinois, and Michigan. Recent statistics show that the combined foreclosures of these four states represent 52% of all foreclosures in the nation (Grand Rapids Press). Americans living in these states are experiencing a housing crisis like this country has never seen, primarily due to a combination of high-risk mortgages, negative equity, and unemployment. This perfect financial storm brooding over the U.S. economy has rained heartache and headache upon countless families over the past few years, and reaches far beyond the realm of only the fiscally irresponsible. I ought to know – I lost my own home to foreclosure in 2008.

When I got married in 2004 I moved to West Michigan with my husband, a first-time homeowner who had acquired a low-cost property and performed major renovations himself in order to keep a low monthly note and gain equity fast. By the time we were married he was enjoying the fruits of his labor and, as far as he knew, doing well. He was the first person in his immediate family to own a home with a 30-year mortgage. His father, a General Motors retiree, had always lived beneath his means so that he could pay cash for almost everything, including his home. The short-term mortgage that his father did have was paid off early, so loans were not his specialty. That’s why my husband had made a fatal mistake before we got married – he refinanced his home during the big predatory refinance boom.

Borrowing against the additional equity in his home, my husband refinanced with a low introductory interest rate on an adjustable rate mortgage (ARM) with an option to refinance again in two years. His plan was to refinance again in two years and acquire a fixed rate mortgage at as reasonable rate as he could get. The money he was able to pull out of the house was used to pay off bills and theoretically create a better financial situation for him and the family he hoped to build soon. With a degree in Business Finance, my husband was not a novice when it came to loans and how they worked. Unfortunately, caught up in all of the advertising and marketing hype of that time, he forgot that he did not have a crystal ball or a prophecy ensuring his financial security two years down the road. Like so many other borrowers in Michigan at that time, he allowed emotions and predatory lenders to convince him of future financial security that was not promised. Subsequently, the house of cards began to fall.

Soon after refinancing we were married and were blessed with our first child within a year. This addition coupled with disappointment in the lack of upward mobility at his job created a great strain on our finances because bills were growing but income was not. A few missteps with his credit plus a bursting housing market bubble and before we knew it, our chances of refinancing when we wanted to were ruined. We were stuck with the balloon payments and a monthly note that we could no longer afford. We succumbed to foreclosure in 2008 and had to move into an apartment that cost more per month in rent than my husband’s original mortgage payment.

The funny thing about it all was that my husband remained optimistic that something would work in our favor soon. While the media was predicting doom and gloom henceforth and forever because of the mortgage industry ‘crisis’, my husband had some foresight that would soon become a sigh of relief – but not without a little intermittent pain to endure. We had to live in a cramped duplex for a year with then three children (twins were born while we were going through the foreclosure process) and although our living space was nice, it was simply too small. However, after gaining a more solid foothold on our finances, with badly tarnished credit and a foreclosure to boot, my husband began looking for a new home to live in. He was able to sense what many economists could not – the changes in the housing market would cause other subsequent changes that would essentially benefit even buyers with bad credit. It was obvious that buyers with good credit would be able to scoop up great properties for pennies on the dollar because of the spike in foreclosures. However, what most market watchers did not predict was the need for property owners who wanted to sell to adapt in order to survive. In the states with the highest amount of foreclosures there are more properties than buyers, and seller who own their properties free and clear or who have good credit but own more property than they are willing to manage now find themselves needing to liquidate these assets without losing too much money.

In comes the land contract, here to save the day!

In his quest for a home to rent my husband found a nice homeowner who was eager to sell, and had no one to sell to. After a few honest, productive conversations, we found ourselves in a position to get a new home that was bigger and worth at least $50,000 more than the one we had lost, without having to rely on a bank for a mortgage loan. The seller was willing to make an arrangement where we could rent with an option to buy, with no interest added to the selling price of $107,245. The deal works well for both parties. The seller is an older man who can no longer maintain his properties the way he needs to. The house we now occupy needs a little maintenance and aesthetic work as well as a new roof in a couple years. So, the option consideration clause of the lease/purchase agreement that requires a non-refundable payment of $3,000 is absorbed by the repair allowance which totaled $7,250. This exchange empowered us to move into the home without paying the lofty contract fee; we maintain control over the repair costs and we will schedule for the renovation work that needs to be done. If for any reason we were to default on the agreement, the renovation that we perform adds equity to the home, not to mention the extra $750 per month the seller stands to make as long as we stay, putting him in a better position than when he entered into the contract. This causes his risk to be minimized and our benefit to be maximized, so long as we maintain our end of the agreement, which we have done and will continue to do. Without good credit and without the help of a lending institution, we have a better home to live in and are on the road to financial recovery.

Although this arrangement is not the conventional road to home ownership, in the State of Michigan, where unemployment is the highest in the nation at a rate of 15.1% (as of October 2009 - Bureau of Labor Statistics) and foreclosures are in the top five U.S. states for number of filings (RealtyTrac), it is a welcome alternative. Prospective buyers in similar positions may find that there are more flexible sellers and renters out there than they thought. It takes some struggle, some research, and some faith, but when the market changes this drastically, buyers can still find sellers who are willing to do what banks and economists thought was virtually impossible – adapt and accommodate.

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Thursday, April 16, 2009

A Family Affair: How Economic Crisis Can Truly Hit Home

The state of the nation's economy is a bit enigmatic; on one hand, an 8.5% national unemployment rate still means that there is a 91.5% employment rate, so the economic outlook is obviously not all bad, despite the doom and gloom reported by the media. However, the 8.5% and those who love them are seeing some of the worst economic times facing Americans since the Great Depression. Millions of Americans are tightening their belts, but the 8.5% are losing their shirts, and when they do, many of them have to call on family and friends to help. According to the Wall Street Journal, rising costs are causing many Americans, even those with jobs, to begin moving in with family and friends, even elderly parents, just to keep their heads above water.

I ought to know; I have a sibling living with me for that very reason.

One of my sisters knows the hardships of the economic downturn, and even the dark side of financial despair. Less hours at work and an almost non-existent job market meant that she had to find other ways to make money. She lived alone and was always very independent, so she didn't like asking for help. So unfortunately, like many other Americans facing economic hardship, my sister turned to crime. She had some brushes with the law when she was young, and desperation caused her to be tempted to revert to her old ways. One minute she was living in a nice suburban townhouse, and the next she was calling to cry on my shoulder because she was losing it all. She had even taken advantage of one of our older relatives who allowed her to get a cell phone on her account. In an inside job gone bad, she ordered over 30 phones in 4 months for resale, and ended up on the hook for all of them. She was supposed to get coupons from an employee of the wireless company so that she could make a profit by buying the phones for a reduced price and selling them at close to retail. The employee stiffed her on the coupons, and she couldn't manage to save the money that was supposed to pay for the phones in the first place. So, she racked up a total wireless bill of $12,000 in someone else's name because her world was spiraling out of control. My sister does not do drugs or alcohol, and she does not have a gambling problem. She turned to fraud to pay her rent and buy groceries.

I know that many of you may find it easy to judge her and may even be eager to judge me for taking her into my home. However, the fact of the matter is that it is difficult to say what you won't do when you feel like your back is against the wall and you stand to lose everything that you have worked for. The family member sought legal advice and is working to protect herself, and my sister is going to pay the entire debt. All of it. However, she won't be able to do it alone. The problem was that she could not survive on her own with the income that she was making, so unless I wanted to see her drown, my husband and I had to step in.

For those of you who are still questioning my sanity, know that she is under strict rules living here; she has chores, my husband has to manage her income, and she cannot have a car or any company that we do not approve. We have small children, so she also babysits. Despite what you might think, the situation is actually working out. There were some tense moments and misunderstandings during the first month as we all got adjusted to the new living arrangement, but now that my sister has stopped blaming others for her circumstances, eaten a slice of humble pie, and begun to understand that we are sincerely trying to help her change her life, she has gotten with the program. It's kind of like a drug rehab, except for someone who makes poor financial decisions. It's hard enough surviving with poor decision making skills in a stable economy; when the chips are down, only the strong survive. In the absence of great mental and emotional strength and a resourceful spirit, a declining economy can ruin some of the best of us, so those who already have questionable living skills are just hardship cases just waiting to happen. However, with a little help from our friends (homage to Joe Cocker), even the worst of us can make a turnaround.

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