26 January 2010

Why We're In The Mess We're In

Yeah, what I'm about to share with you is bare bones, but it's illustrative of the problem we face in our Nation today.

Several years ago I had a house for sale. I chose to sell this house in one of the worst real-estate downturns our area had experienced in years. The house sat with an agency's sign out front for 3 months...
And got nary a nibble.

Neighbors had asked me about the place, but although I knew them to be of good character, their financial history was such that banks wouldn't consider lending them the money to buy my house.
My contract with the agent expired and they took their sign off my lawn.
By this time we had moved into our new home and were paying payments on two mortgages.
A couple more months passed. I needed to sell this house!

I approached one of the neighbors who had asked about the place to see what sort of deal we could work out. He was pleased...
His elderly Mother was moving to the area and he didn't want to bring her beneath his roof, but wanted her close enough to check on her frequently. My empty house would be perfect for him.

By this time I had reduced the price of the house to $30,000. To sell him the house "contract for deed", I was asking 8% interest... just slightly more than the bank was charging on a loan, to cover the extra risk I was taking in selling the house to someone the bank wouldn't take a chance on. As I explained my proposal to my neighbor he nodded his head and smiled. I began to feel "warm and fuzzy", 'cause it was beginning to look as if I'd get some extra income to cover the burden of having two mortgages sucking my checking account dry.

Then came the bombshell:
He said to me, "She's on a fixed income. Her budget will only allow for a house payment of $200 per month. If you'll agree to accept a payment of $200 per month, we've got a deal!"

"Uhh.... no, that won't work."
"Why not?"
He said this with a questioning look on his face. It was as if I had slapped him. He obviously thought I would jump at the chance to sell this house under almost any circumstance.

So I got a pad and pencil and scratched out the figures...
"$30,000 is the selling price. The interest rate is 8 percent, or .08, right?"
He nodded... with me so far.
"So $30,000 X .08 equals $2400 in interest per year. $2400 divided by 12 equals $200 monthly. If your Mother pays me $200 per month she'll be paying me interest alone and will never own the house."
Now it was his turn to be shocked,
And I was surprised that he was shocked. This was BASIC stuff...
Why hadn't he figured this out on his own? Why was it not obvious to him before he came to make the deal with me?

So when you wonder why the general public is not in an uproar when the Obama administration takes steps to add yet another $30,000 in future debt load to every boy, girl, man, woman, and transgendered person in the United States...
consider that most voters are CLUELESS about what is going on here!

(And I'm feverishly trying to sort out how I can make a ton of money taking advantage of folks like my neighbor without projectile vomiting when I look at myself in the mirror.)


jinksto said...

Interesting to me is the fact that were you a bank you would be found wanting for not making the "loan" anyway. You would be publicly disgraced for not helping the needy. While if you HAD made the "loan" you'd be attacked for taking advantage of the income limited elderly and causing the economy to fail... even if the government made a law that said you had to make the loan regardless of ability to pay.

Banks, of course, aren't completely innocent here. A few years ago the wife and I were buying a new house. In order to keep things simple we got pre-approved for a loan. Just to make sure that we could actually get a loan that would cover what I thought my budget was. The bank said that they would be happy to loan me $350,000. An amount that was about double the budget that I had determined I could pay back. The real estate agent went ballistic and acted like I had been keeping something from her. I was shocked. There was no way I could afford a loan like that but several people were kind enough to explain how balloon payments worked and how I could just refinance that balloon payment after 5 years. It all sounded very simple but I was adamant that we stick to our original budget. For years after this I would tell this story and people would look at me like I was crazy... "Why didn't you?" they would ask. Those are the same people talking about the evils of big banks right now... go figure.

Greybeard said...

Interesting, TJ...
And as the late Paul Harvey would say, "Now... the REST of the story!"

Acting as the bank, I pretty quickly found out why the banks wouldn't lend money to these folks. As I said, their character wasn't bad...
But financial necessity is hard to overcome. I ended up signing a contract for deed with one of my neighbors on this house. A year later the husband lost his job and quit making payments on the place. It was Wintertime, so having the house occupied seemed better than having to run every time a cold snap hit to see if pipes were frozen. I waited until Spring to force the issue, then went to check and see what we could work out. Entering the house I noticed most of the furniture was gone.
"Are you moving out?!!"
The hesitant response....
"...Yes. Yes we are."

...Stiffed me for four months of house payments and forced me to scramble to find another buyer.
(And the next buyer wasn't a lot better.)

I learned the lesson that the old adage about mixing business with friendship being a REALLY bad idea!