Housing Soap Opera

I thought I would send you an email to let you know how my personal housing
soap opera finally played out.  I say finally because for me, it is the end.
But for the main character in my soap opera, I think this is only the
beginning.  Your readers should enjoy the saga.

It started when my wife and I wanted to rent a house several years ago.  We
looked around for a decent place to live for our large family, we have nine
children, and found a house for rent from a man we'll call Ed.  It was new
construction.  We moved in agreeing to pay a rent of $2600 a month for a
4000sqft house.  This may sound like a lot if you're not from a major city.
But it was a good deal.  To buy the same house at the time would have been
closer to $3500 a month.

A week after we moved in, we received a letter from Ed saying that he had sold
the house to an investor.  Not a problem we thought, just tell us where to send
the rent check now.  It took us nearly six weeks to locate the new landlord.
We'll call him Lance.  Lance appeared one day to pick up the rent.  I try not
to judge people's financial situation from their appearance.  But let's just
say that his blue-collar Chicago south-side appearance (and old econo-box car)
didn't match the high $300s north side house he just bought.  While standing in
our dining room, he asked us questions about the house, questions like,' This
house has a basement, right?'  He wasn't even sure how many bedrooms and
bathrooms the house had.  He had been in it before he bought it, right?  He
claimed he bought the house as an investment property.

After he left, my wife and I started doing some calculations.  We knew the sale
price of the house.  We knew what property taxes were going to be.  We also
knew about what interest rates were.  And of course we knew our rent payment.
We didn't know how much he put down.  But assuming little or no money down, he
had to be in the hole about $1000 a month.  How could this be a good
investment?

After we were in the house for a while, my mother was looking to buy a
foreclosure in the Chicago area.  She found our house on realtytrac.  So I
called Lance to ask him what was going on.  He had a sob story about how his
wife was taking all the rent and not paying the bills, and how she ran off with
some other guy.  Then he promised to get everything caught up.  As months went
on, the foreclosure progressed.  We were told by several real estate attorneys
that even though he wasn't paying the mortgage, as long as he still had the
house, he could evict us for not paying and sue us for the remaining payments.
And worse, if he filed bankruptcy, and we moved out before the end of the
lease, the trustee might assume control of our lease and sue us for the
remaining months in an attempt to repay his creditors.  So we stayed in the
house and (maybe stupidly) kept paying.  Maybe we were just paranoid.  But we
weren't getting a lot of good advice on the situation.

As things drug on, we learned the date of the auction.  We also discovered that
he hadn't paid the property taxes on this house or his own house.  We also
learned that his own house was in foreclosure and that he had moved into an
apartment.  I called him again and let him know that we wouldn't be paying the
remaining two months before the auction so that we could get our deposit back.
And we started to look for another place to live.  He stuck to his original
story trying to convince me that he would bring everything current.  After
moving out, the house went into foreclosure and sat empty for months.

A few months before we moved out, we went' mile up the road to the model for
the neighborhood and priced out the house we wanted.  It would have been about
$450k and with taxes would have cost about $4000 a month.  This was the summer
of 2006.  We decided that something seemed very wrong with housing prices and
decided to continue to rent.  This may be the best decision we have ever made.

We looked through the paper and discovered a house for rent by' Ed.  And it was
nearly the same house that we had priced out in almost the same location a few
months earlier.  It would be an easy move right up the street, and the kids
wouldn't have to change schools mid year.  And for rent, he wanted $2400 a
month, $1600 less than what the (fully property taxed) mortgage payment would
have been.  And it was $200 less than the house we were leaving, even though
the new house was bigger.  We signed a two year lease.  He paid $421,000 for
the house.  Our lease had an option to buy at the end for $535,000.  He came
right out and told us that he was losing $200 a month on the house, but had to
put someone in it.

A year went by.  The housing market crashed.  And my wife and I again found
ourselves wondering how long the landlord could hold out.  By this point,
property taxes had kicked in.  And we knew that he always took 1 year ARMs, so
his mortgage payment likely had gone up.  We did some math and concluded that
he was in the hole quite a lot on this house as well.  But there's more.  We
knew that he had at least eight other renters.  Was the cash flow for those
rental properties also negative?  He also had some empty houses.  That couldn't
be a good sign.  Still, he seemed like he had good business sense.  Maybe he
was sitting on a huge pile of cash and just riding out the storm.  We began to
watch realtytrac again anyway.

We did a fair amount of research into Ed and his history with flipping
properties.  There had been a lot, over 30.  And more interesting, quite a lot
of them, maybe most of them, had gone into foreclosure in less than a year of
the sale.  Still, we said nothing about all of this.  After all, it was none of
our business.

This past January, several of his other houses showed up as foreclosures.  So
we knew the game was over for him.  But still, it was none of our business.  So
we said nothing.  It became our business when our house appeared as a
foreclosure several weeks later.  So I called.  As expected, he had
over-extended himself and got caught with too many properties to flip and no
one to buy them.  He had 10% equity in all of the houses and couldn't
understand why the banks wouldn't give him access to his money.  Currently, he
as 14 houses in foreclosure and we expect a few more to be added shortly.  To
make matters worse, the rumor among all his renters is that he signed an
affidavit on each of the mortgages indicating that he would live in the house,
which led to him being sued for back taxes.  In spite of the effect he's had on
our life, I don't wish him any ill will.  But I wouldn't be surprised if he
ends up in jail.

The bright spot in all of this is that we've found a new house.  It's an REO
down the street from where we are now.  And it's the same model and floor plan
as the house we're in now.  For a foreclosure, it's in great condition.  It
only needs about $3000 worth of work before we can move in.  It sold new two
years ago for $485k.  That's not including about $20k the previous owners put
into a deck and fence.  It's definitely better than the house we're in now as
well as the house we priced out a couple years ago.  We made a bid of $312k
which was accepted, $15k less than the asking price.  That represents a 35.6%
drop in 24 months, not bad considering the CME housing futures are predicting
an 8% drop for the Chicago area by 2010.  And with the interest rate we got,
it's $50 a month more than the rent in the house we're leaving.  We're planning
to stay for 10 to 20 years until the kids grow up.  It will be nice to have
some stability again.  Maybe with the way the dollar is crashing, I'll be able
to pay off the mortgage in a few years with some loose change.