So in the fog of the morning while I’m sipping on my first cup of coffee my phone rang. Reasonably sure I was awake enough to form sentences I answered. It was a call from a family member about a family friend that was swooping in to help another friend avoid foreclosure. That clear enough for you?
I start asking the pertinent questions:
- How far along is the foreclosure?
- Is he receiving notices?
- How long has it been since he had paid?
- What is the value of the house vs. amount owed?
- Can she afford to do this?
- If she does this is she planning on moving into the house?
The answer was “Oh she doesn’t know any of that, she just wants to help out.”
Having seen the absolute devastation of foreclosure – nothing makes me sadder than walking through a foreclosure before cleanout and seeing growth charts and children’s toys – I can really appreciate the wonderful loving gesture, but I don’t want to see anyone jump into a situation like this without clarification and knowing all the facts. My advice to this family friend, and to anyone else who is thinking about taking this step, PLEASE talk to a lawyer first to find out how far along the process is. Don’t make promises and start flashing money around until you know if it’s even a possibility for you to save the property. Next we need to look at the current market condition to see if the house is worth what is still owed on the loan. While it is valiant to want to save the property for your loved one, you really do need to also be realistic about the downsides for you. Slapping down a huge wad of cash to cover the gap between home worth and loan amount owed is something you really want to think long and hard about.
What happens in a year if the person decides that they no longer want to live there? Do you want to become a landlord to a stranger? Is there a rental market for the property? Will the rent be able to cover the monthly mortgage payments? Is this a property that you would consider investing in otherwise?
And here’s the kicker–why is this person in the situation to begin with? Did they lose their job? Take a pay cut? Have an extended illness? Or is it because they have a shopping addiction or spend $10,000 every month on eating out? If they are in this situation because poor money management or wasteful spending this may not be the most sound decision for you to make. I know, I’m such a downer, aren’t I? If you think that’s bad, keep reading.
Before moving forward you need to sit with a lawyer and hammer out the legal arrangement with your new renter/roommate. Being practical here, although you know and love this person you both need to be protected in case it’s not all rainbows and unicorns in the future. I know this is a touchy subject but for protection of both parties this awkwardness has to be endured. Let the lawyer do their job and walk you through all the scenarios and draw up documents for both parties to sign. Remember, the trapeze artist doesn’t plan on falling, but still has the net there just in case.
