Friday, January 15, 2016

Personal Finance

This is a double-whammy personal finance story. The first part involves a huge mistake someone else made and the second part is my mistake trying to fix the first one.

Years ago, one of my uncles bought a house. At the time, I was very happy for him; he had been taking care of my grandparents and living at their house. He’s usually a pretty savvy guy so I figured he did all of the right things: home inspection, market comparison, etc. Imagine my surprise when I found out that none of that was done.

I found out when he called me asking for help. He’d switched employers about a year earlier as the new one promised more work (he was an over-the-road trucker). Well, the new employer only kept that promise for about nine months after which his workload dropped by 50%. Of course, that meant his pay dropped, too, and he was behind on his mortgage.

Family is important to me and I was in a good position to help him, even though I saw some pretty significant red flags. The biggest one was the mortgage payment itself: $1,300/month. Now, that’s not too crazy for some properties, but this house was about the size of my apartment at the time, just 900 square feet! I did a little market research and discovered that the house was valued at roughly $40,000 less than he paid for it. Not only was he behind on payments, but the house was completely under water in terms of resale value.

Here’s where my mistake happened: knowing all this, I still agreed to help him. I caught up his mortgage (3 months worth of payments) and he agreed to pay me back when work picked up again. He also started looking for a new job. About 5 months later, I had only received about $1,200 of the $4,900 I loaned him and he called saying he was behind again. Work hadn’t picked up and he had no luck finding a better job.

He was so proud of that house and so confident that things would turn around (he typically out-earned me by almost 50%), that I bit the bullet one more time and paid another two months mortgage payments.

Sadly, this story doesn’t have a happy ending. Six months after my last loan to him, he was behind again and I’d only received $600 of loan repayment. At this point, I knew that things weren’t going to get any better with this situation and told him that I didn’t have the money to help him again. He struggled with that house for another 6 months before he finally had to give it up.

The bank took it and he received $5,000 through a cash for keys program in which banks were paying the owners of foreclosed homes for turning the homes over in good condition. He used the money to catch up on other debts and settle into an affordable apartment. I never saw another dime of what I’d loaned him.

The moral of the story is: helping people is a good thing, unless you end up hurting yourself in the process.

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