My Property Foreclosure: Part I

It is old news that property foreclosures in the United States are happening at the highest rate since the Great Depression. There are many reasons for foreclosures including exotic loan products that were not well understood, abused, or misrepresented. Some property foreclosure stemmed from financial missteps, greed, and even fraud, by the homeowner or investor. Every foreclosure has a story, here is mine.

In February 2006, I bought a rental duplex with my then fiancé. We’ll call him Rob. I already owned a home and Rob and I had been living in it. He wanted a house to call our own. The plan was that we would buy a house, marry, move into it together and rent out my house. The plan never worked out, not even close.

I found the duplex. I looked at it first with the realtor. The realtor said it was vacant only because prior to the sale that had recently fallen through, the buyer had wanted it empty. The seller had given his month to month tenants their thirty days to move, and then the buyer didn’t buy. The seller wasn’t quite desperate, but he really wanted to sell. The realtor said that the seller’s wife had health problems and they just couldn’t manage a rental property. The seller’s wife was in a wheel chair.

I planned on moving into the duplex with Rob and renting out the one bedroom apartment there. It seemed like a good solution to everything. Rob didn’t get along with my seventeen year old son and it seemed only fair to all of us that Rob and I should have our own house. My son could stay at my house and live in the efficiency and I would just rent out the front of the house. It could have worked, I would still have only been ten minutes away from my son, close enough to keep an eye on him, but far enough away to keep the peace.

The two bedroom side of the duplex was only slightly smaller than the front of my house which Rob, my son, and I shared. Our furniture would have fit just fine. The yard was large and shaded by two huge oaks. Most of the houses on the street were owner occupied, this was not a street full of torn up rentals. The houses all looked pretty good, except for one or two that were a little run down. I was looking forward to moving, getting married, and new beginnings.

The duplex was cheap. The asking price was about $40,000. less than I would have guessed. I thought it was a good deal. Granted it needed work. The structure was sound. It had been a house at one time and then the garage had been converted into a separate apartment. The house side had two bedrooms, one bath; and the converted side had one bedroom, one bath.

I was feeling good about rental property at that time. I had bought my house, the house that we lived in ten years before as a foreclosure. I had renovated it and turned part of it into a mother-in-law efficiency which had been steadily rented for years. In 2004, before I had ever met Rob, I had bought a condo as an investment property. The condo had been vacant and used for storage since it had been built in the 1970’s. They took the green shag carpet out just before we went to closing. I had successfully renovated and rented the condo. So I was feeling good about rental property, renovating it and keeping it rented.

We made an offer on the duplex and negotiated some help from the seller for repairs or closing costs. I fully expected to move there once we closed on it. The two bedroom side needed a little work to make it nice, and the one bedroom side needed more work. The mortgage loan was a piggyback 80/20 loan, which is code for 100% financing. We didn’t put anything down on the property, the only money we spent was the closing costs, which was my money. Both of the mortgages had prepayment penalties on them. I thought that the prepayment penalties both expired after two years, but found out much later that the prepayment penalty on the second mortgage, the 20% loan did not expire for three years. Both of the mortgages were adjustable rate mortgages (ARM’s) and both were set to adjust in two years from the closing date.

Our attitude toward the questionable loan terms was heavily influenced by the mortgage broker. She said, and we believed, don’t worry, in the next couple of years this property will appreciate and you can refinance out of this loan into a fixed rate. The loan was fixed for the first two years and then would re-set to an adjustable rate. I found out much later that the adjustable rate was to be tied somehow to the London Interbank Offered Rate (LIBOR) and not to U.S. Treasury Bills, which I was more familiar with. I never found out exactly how the adjustable rate was tied to that index, only that it was somehow tied to it. I’m sure that relationship must be buried somewhere in the loan documents. At the time, however, we did not care. We planned to either refinance or sell before we had to deal with a rate adjustment. At least that was the plan.

We relied on the home inspection from the previous sale that had fallen through and did not pay for our own home inspection. It sounds stupid I know. But, the inspection was only a few months old and had not uncovered any real defects in the house that we couldn’t see for ourselves. The home inspection included only a visual inspection of the roof from the ground. This is not unusual. Home inspectors are not roofers. A home inspector may or may not climb up on a roof to inspect it. It varies from one inspector to another. I didn’t know anything much about roofs and still don’t. I only know that when they leak they can cause an expensive mess. The realtor said that he thought the roof had fifteen more years of life. Granted, the realtor is not a roofer either, but he should have stayed quiet. From the inside of the duplex, there were no signs of water damage from a leaky roof. The ceilings had not been painted in a long time, so it seemed reasonable to believe that the roof did not leak. I learned later that this was also a mistake.

We went forward with the purchase of the duplex. Rob and I thought we were making a wise decision. The rent from the two apartments should have easily covered the mortgage payments and expenses. We knew we would have money out of pocket for the initial renovation, and we accepted that as a fact of doing business. We thought that the money we would have to spend on renovations would easily come back to us as sweat equity.

The ownership of the duplex was put into Rob’s name alone. I have known forever that it is a bad idea to put money into a property which you don’t own. But I fully expected to marry Rob, move into the property together, and then we would refinance the property into our names once the prepayment penalties expired. Wrong again. In hindsight, I should have made sure that the note was in Rob’s name and the deed was in both of our names. My credit and income could not qualify for a mortgage. I had my house in my name and I was collecting unemployment. But, I should have made sure the deed was in both of our names. I trusted that things would go as planned, which they did not.

At the closing table, the closing agent, said that the loan terms did not include a requirement that we live in the property. The lender was Bayrock Mortgage, located in Alpharetta, Georgia, now bankrupt. I fully expected to move into the two bedroom side of the duplex once we fixed it up. And then we could conveniently work on the one bedroom side. That’s what I thought was going to happen.

As new owners of investment property we immediately began renovations. We started on the two bedroom side because it needed the least amount of work. Shortly after closing, once Rob found out that the loan did not require us to move in to the duplex, he decided he did not want to move there. Rob wanted us to stay put in my house. I wasn’t sure where that left us, I thought that the whole idea was to have a place of our own together, instead of us living in my house, the house that I had owned for years, and will always be my house.

I guess Rob was afraid of the neighborhood. As a former law enforcement officer, Rob was, by nature and habit, suspicious of everyone. Everyday I would go to the duplex and work on it. Rob was working full time and would come to the duplex after work everyday to help. If I ever failed to lock the front door when I was there by myself, Rob would tell me about it. He told me everyday to keep the doors locked.

I had learned not to pay too much attention to Rob’s auspiciousness. But I did try and humor him. I would dutifully lock the door while I was working. It was Rob’s suspicious nature that caused the tension between him and my son. I finally chose my son over Rob, even though some of Rob’s suspicions turned out to be true. But that’s another story entirely. The neighbors on the street did not seem so bad. They mostly kept to themselves, but once in a while one or another would stop over to see the work we were doing. The street was a dead end. Beyond the dead end there was an apartment complex supposedly blocked off by a chain link fence. A hole cut out of the fence made it a popular shortcut for residents of the complex to walk to the main road. Most of the foot traffic was teenagers. I didn’t bother them, and they didn’t bother me. There was a lot of vehicle traffic on the street for a dead end. Cars would come down the two block street and turn around at the dead end. The neighbor that lived in the house across the street and one over would come over occasionally and want to talk. He said he was on disability because of a auto accident and couldn’t work. He spent much of the day, most days sitting on the hood of his car which was parked on the street. His friends would stop by to visit. He didn’t bother me and I didn’t bother him. The street was quiet during the day and I never spent a night there.

We closed on the duplex on the last day of February, 2006. During March and April we completed all necessary repairs and improvements on the inside of the two bedroom, and started renovations on the one bedroom. In the two bedroom we replaced the stove and refrigerator; painted all of the interior semi-gloss white; installed new ceramic tile in the bathroom and kitchen; and installed new commercial carpet. It looked nice. It looked nicer than it had likely looked for a very long time. It was bright, airy and clean. I was happy to have made such a homey space for someone to live.

We rented out the two bedroom apartment for the first time on May 1, 2006. And then the games began. I usually like tenants. Tenants, after all, are the lovely people that pay the mortgage. I try to stick to my philosophy that tenants in general are just bad children. Tenants bear watching. Generally, I believed at the time, their antics are transparent and they can easily be reined in with firm and consistent communication. Wrong again.

The next installment of this series includes some of my adventures as a landlord. All kinds of things happened, including home invasion, burglary, arrests, and evictions. The last straws were arson and foreclosure.

Home Appeal Specialists, LLC
Because of my experiences I am now in the business of helping other people who find themselves in similar circumstances.