Tuesday, September 2nd, 2008...9:56 pm

The Care and Feeding of an Alligator, Part I

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Don't Feed the Alligators

Creative Commons License photo figure credit: timtom.ch

Nearly 7 months into starting this blog, I have finally gotten around to a post concerning the name of this websiteScrapperMom and I have an alligator on our hands, and here’s the story of how we got into this situation and our options for getting out.  I have avoided this topic for some time because, as you will see, it is a particularly painful story for us, but one that has taught us many important lessons.

Three and a half years ago I left my job as a nuclear plant operator in search of more (or less, depending on point of view) exciting opportunities.  Our previous house was bought because of its close proximity to the power plant, which is, like most nuclear power plants, in the middle of nowhere.  We started a search for a new house, and laid out a set of criteria.  When our search revealed that we could not afford to buy what we wanted, where we wanted, we turned to a more creative solution: we would look for a multi-family home so that rent from one unit could help to offset the mortgage on the property as a whole.

To be clear, we were not looking for anything extravagant.  In early 2005, home prices in our market were just reaching their peak (unbeknownest to us, of course) and even a modest home was beyond our financial reach.  We considered renting, as well as purchasing a condominium, but decided that this would be exceptionally difficult with our two Great Danes.  Since multi-family homes usually cost less per unit than a single family home, or even a condo, it seemed to be a good compromise for us — one that might eventually even develop into a nice investment down the line.

In the Spring of 2005 we found a nice house in a nice community, one with walking access to a number of different services.  The house is close to the local commuter rail, hospital, community swimming pool, conservation area, etc. The previous owner of the home had completed a number of major updates to the 1920 structure, including wiring, roofing, the conversion of the attic into a bedroom, etc.  The house was in need of a number of cosmetic updates, mostly relating to the exterior.  Compared with the other homes on the market that we had seen, this home was a bargain.

We plunked down 10% of the purchase price from the proceeds of our previous home sale.  We financed the rest of the cost through a 3/1 ARM and a home equity line of credit.  I was actually still between jobs at the time, but our excellent credit allowed us to obtain a no-documentation loan, which meant that the bank took our word for it that we made enough income to cover all the costs of the home and then some.

Many readers here are probably cringing after having read the last paragraph.  After all, this story so far is very similar to that of thousands of people who are presently losing their homes, and has all the danger signs: bought an overpriced home at the height of a market bubble, took out a variable rate mortgage, did not have full income, easy credit was available without documentation.  The only saving grace in this scenario was a decent size down payment.

Within a few months of moving in, we had found a great tenant who was willing to look past the cosmetic issues of the house in favor of its inner beauty, as well as the other attributes I mentioned above.  Since I had secured a stable job, it was important to us to remedy the blemishes to be sure that we would not have difficulty renting in the future.  We got a couple of quotes for vinyl siding, new energy efficient windows on the 1st floor, and two new porches.  The most reasonable bill was about 8% of the value of our home.  We financed these capital improvements on a combination of 3 different credit cards.  (I know you’re cringing now.)

Around this time, the bottom started to fall out of the over-inflated market.  Since we bought this house, we have added approximately 8% to the value, while at the same time the market has plummeted.  My best estimate at this point is that home’s value has fallen almost 20% from the sale price, meaning that on paper we have lost almost 30% of its value in just 3 years.  This leaves us upside-down on our mortgage — meaning that we owe more on our mortgage than our home is worth (see picture above), in credit card debt, and feeding an alligator month after month.

If you haven’t already, consider subscribing so that you are among the first to know how this sad tale ends up.  Do you see redemption ahead, or bankruptcy?  Have you ever had to deal with a similar situation?  Please share your thoughts in the Comments section below or by clicking on Comments.


  • This must have been hard to post.

  • It was. But it’s important for our readers to know that we’re not perfect either.

    “Learn all you can from the mistakes of others. You won’t have time to make them all yourself.”
    — Alfred Sheinwold

    “Good judgment comes from experience, and often experience comes from bad judgment.”
    — Rita Mae Brown