Re: HELP! Willpower weakening! Yearning to buy barely-affordable luxury house!
OK, SLC, I feel like it's late on the election night but the numbers are still too close to call.* Where's the swing vote coming from?* Have you made an irrevocable decision yet?
It's sea story time.
In mid-1989 spouse & I bought a house (with every last penny of our savings) for $277K with a $238K mortgage.* 4BR, 2BA, 1873 sq ft on a 5000 sq ft lot in a nice bedroom community only 25 minutes from our work.* It was 10 years old and ridden hard by tenants but we thought we could handle the repairs.* And unlike many Hawaii homes, it had a garage!!* We needed both jobs to swing that massive $1824/mo mortgage payment but we (and our mortgage company) felt that our Navy employment prospects were pretty good.
I was at sea or away at school through March 1990 (but what an adventure).* Spouse managed to paint the inside & outside, spiff up the yard, and replace the "draperies" while I helped out during one or two weeks' leave.* (She did so much on her own that I'm STILL paying back this obligation.)* In April, when the master bathtub drain started leaking through the wall into the adjacent room, we decided to fix it by upgrading to a whirlpool tub.* We couldn't find a plumber who wanted to touch the job in our price range so we'd ripped out the bathroom to the studs and had the new tub sitting in the garage while we cut a new drain line through the foundation.
On Sunday afternoons we entertained ourselves at open houses.* At the end of May on Alapio Drive in Pupukea, high above the North Shore, we found THE house-- brand-new 3 BR, 2.5BA, 3000 sq ft with cathedral ceilings & ocean-view windows on 1½ ACRES (almost unheard of on Oahu) plus a 900 sq ft downstairs suite that could be converted (illegally) into a rental apartment.* The backyard opened onto Waimea Valley, conservation land that'd never be developed.* It was for sale by the builder for only $625K.
We immediately got the great screamin' gimmes and frantically tried to come up with the financing.* As I recall we needed to sell the house for $425K, take out a $400K mortgage, and get the seller to take back $30K.* We'd be wiping out our bank accounts (again) and we'd have to rent out the downstairs apartment, but the cashflow would just make the mortgage.* Oh, we'd have a 60-minute work commute each way, but it was WORTH IT just for the view.* Besides I was at sea most of the time and sleeping on board inport every fourth night anyway.* The commute was the least of my worries.
We expressed some concern to the seller that we wouldn't be able to get a first mortgage if the second mortgage officially existed, and the seller/realtor both said "That's OK, we'll take your note for the $30K and we won't record it."* We were a bit incredulous but we were assured that it was "common practice" in this neighborhood.* So, smiling blissfully, we put down $5000 plus a contract (filled with contingencies!) and our $620K offer was accepted with the usual "vacate your contingencies if we get a cash offer" clause.
In mid-June we put our house, with the master bathroom still ripped to studs and the new tub in the garage, on the market for $425K.* We were thronged with crowds at the open houses and we had plenty of interest from realtors & customers... but we didn't get an offer for six weeks.
Saddam Hussein invaded Kuwait in August.* Oil prices spiked.* Japanese visitors, terrified of a war or an oil crisis, stopped coming to Hawaii.* Housing prices stopped in their tracks and began a decade-long downward spiral.* We managed to sign a sales contract on our house for $385K (the tub was at least hooked up and the drywall was in) but it was full of contingencies.* When we took the contract to the Pupukea house, the realtor's boss had a stack of paperwork to sign, including an innocuous recording notice for the second mortgage.* We objected and he demurred that his client couldn't possibly have an unrecorded loan, and that "the first lender would never notice it anyway".* Stymied, we stopped signing and left the office to consider our options.
The following week the owner got a full-price cash offer and we were asked to vacate our contingencies.* We refused to do so until we settled the 2nd mortgage issue and the negotiations turned ugly.* After a couple months' threats further negotiations we realized that the Pupukea home was losing its value and wasn't going to appraise high enough to approve our loan.* So, after more ugly negotiations, we agreed to forfeit the $5K and they agreed not to drag us into court litigate for breach & damages.
Rumors of deploying Schofield Barracks' 25th LI to Iraq caused rents in the neighborhood to plummet (along with our projected cash flow).* The home sold at $625K per the contract but we learned (years later) that the under-the-table actual price was $575K.* We cancelled our home sale and finished the master bathroom.* Driving back & forth to the North Shore made us appreciate how much that hour-long commute would truly suck, especially if we got called in late at night.* A year later we read of a federal crackdown on unrecorded loans which would have busted us and made us pay off the second a few years early (with credit cards?!?) or lose our first mortgage.* Two years later we were raising a kid and Pupukea is not exactly one of the island's best school districts.* After "winning" the Gulf War, the military went through its biggest drawdown since WWII while expanding its base housing facilities.* A combination of fewer military tenants and new home construction killed the market.* Rental vacancies skyrocketed (what cashflow projection?) and home prices cratered almost as fast as the rents.* By 1996 that $625K Pupukea home was appraised at $385K and our $425K home was at $260K.* Good thing we never got that home, because in 1994 the Navy surprised us with orders to San Diego and we would have been trying to rent to both upstairs AND downstairs tenants.* We both felt lucky not to have been downsized as well.
My point is that we were way out on the bleeding edge of the risk/reward envelope.* Any single one of the above events would have pushed us over the edge from "making it" to possible bankruptcy.* We would have had no cashflow or savings reserves to ride out surprises.* I can only imagine the expense of trying to arrange childcare for a baby with two active-duty parents who lived an hour's drive away from work.* During our San Diego tour we were hemorrhaging cash on renting out our original home, and it would have been even worse if we'd "won" that Pupukea home.* We wouldn't have had much choice, though, with a mortgage balance higher than the appraised value.* We would have bled until we ran out of cash, and I'd still be working today.
All things considered we felt lucky that the tuition at the School of Experience was only $5000.* When we look at real estate now, we focus on what could go wrong.* We know there's no problems when things go right.
So... wipe that blissful grin off your face and reflect for a moment-- what's the worst that could happen if you buy that big house?
Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
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