Q: A few years ago, I paid $500,000 for a condo as part of an investment strategy recommended by my now ex-husband’s mortgage-broker relative. We received $10,000 and rented the home back to the former owner, who got enough money to pay off her debt.
Now I’m divorced and the place is worth only about $200,000, plus the former owner/tenant has fallen behind on the rent. She’s trying to buy it back from me on a short sale, but might not be able to qualify to buy the place. My credit is ruined (from the short sale and from defaulting on the payments because the rent stopped coming in), I’m stuck with this upside-down home, and I’m starting to feel like I’ve been taken advantage of. My only goal in this whole thing was to support my husband’s investment dreams and help this woman stay in her home.
A: A good friend of mine, Bari Tessler, runs an outfit called Conscious Bookkeeping, which takes a therapeutic approach to enlightening people’s relationships with their money. She teaches something to the effect that generosity that is detrimental to the giver is not authentic generosity. It strikes me (and I’m sure, by now, has stricken you) that such was the nature of your generosity — both to your then-husband and to your current tenant. It was generosity you were not in a position to afford, and that has come back to bite you.
As well, there was a shady element to the original transaction you undertook, although it sounds like you were not fully aware of what was going on. When a real estate or mortgage professional undertakes to "rescue" a homeowner from her financial troubles by finding an "investor" who purchases the property at a high price, doles some cash out to everyone involved and then leases and later sells the property back to the original owner, that is called "equity stripping."
It was somewhat common during the heady middle years of the last decade, when home values were so high it was easy to get properties to appraise at way more than sellers owed on them, and mortgage money with "cash out" was easy to come by for the investors.
Doesn’t equity stripping sound bad? Well, that’s because it is bad. Often, the real estate or mortgage professional who set the deal up got more out of it than either the seller or the investor, who both actually ended up with big downside potential to the small upside they received. The investor got a little cash, but often ended up with an upside-down property (like you did) and/or a new mortgage payment with a less-than-reliable rental income (like you also did).
And while the seller often did get a bailout, many of them were financially unsophisticated people who didn’t realize that they could have bailed themselves out and retained either the title or the equity in their home — or both.
Even sellers who were good lease-back tenants gave up their tax advantages of homeownership and backed themselves into a corner like the one your tenant now faces: They are unable to now purchase the home back, as planned, because values have dropped so much the home cannot possibly appraise at a high-enough price to pay off the seller’s loan.
So they must now find themselves at the mercy of the investor/landlord and the bank(s) involved, who may or may not agree to a short sale.
Fortunately, equity-stripping practices have been largely outlawed, especially since so many sellers were rendered vulnerable to "rescue" from fears of foreclosure. It’s also just much less feasible now, given how much values have fallen and how hard it is to do a cash-out purchase of anything given today’s mortgage markets.
You sound like your intentions were relatively altruistic, from the beginning of this transaction. But in the future, you should be a little more selfish when it comes to ensuring that you can afford your generosity, and apply a lot more scrutiny to the real estate investment transactions you undertake.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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