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The Underwater Mortgage – How to Survive Your Sinking Ship While Keeping Your Sense of Humor
Bud and Kristin Gragg
Published by Bud Gragg at Smashwords
The Underwater Mortgage
How to Survive Your Sinking Ship While Keeping Your Sense of Humor
TABLE OF CONTENTS
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Chapter 1—Awash in a Rising Tide of Red Ink
Chapter 2—A Long Strange Trip, Part 1
Chapter 3—From Racing to Real Estate
Chapter 4—A Long Strange Trip, Part 2
Chapter 5—Sitting and Staring out of the Hotel Window
Chapter 6—Lions Rule the Jungle but Monkeys Have All the Fun
Chapter 7—Storm Clouds Are Gathering
Chapter 8—Memory Lane Is a Place in Your Head
Chapter 9—Self-Denial and the Art of Kidding Yourself
Chapter 10—Put All the Cards on the Table and Stack the Deck In Your Favor
Chapter 11—Mirror, Mirror, on the Wall
Chapter 12—Pulling The Plug—or Maybe It’s The Pin
Chapter 13—The Clock Is Ticking–or is That a Time Bomb
Chapter 14—Moving On Out and Moving On Up
Chapter 15—We Won’t Get Fooled Again
Chapter 16—A Graduate Degree from Screw U
Chapter 17—The Road to Hell Is Paved with Good Intentions
Chapter 1 - Awash in a Rising Tide of Red Ink
The signs were all there: the Earth shook. The ocean bubbled. And the waters receded suddenly as if sucked up by a giant vacuum. It’s time to get off the beach . . . a tsunami is coming! Instead of the ocean’s fury, though, it’s the monstrous tide of underwater mortgages. And it’s rising higher! Most experts predict that it will continue as property values drop and more people go underwater every day. The ground hasn’t stopped shaking yet! So, what is an underwater mortgage anyway? Just in case you’ve been hiding in outer space or in a coma (welcome back, by the way), being underwater on your mortgage means you owe more than what your house is worth. It’s called negative equity . . . and anything negative can’t be good!
Not scared yet?
Try this, courtesy of a First American Core Logic report as of the end of fourth quarter 2009: 24% of US homeowners with mortgages owe more on their homes than they are worth. That is nearly one out of every four people who have a mortgage! Yes, 11.3 million of us are walking around either oblivious or valiantly trying to fight our way to higher ground. Even more frightening, the recent stats don’t tell the whole story.
They don’t count the record numbers of people who have already foreclosed on their homes . . . or the overwhelming tide of foreclosures to come! Unfortunately, with real estate values falling off a cliff—and no soft landing spot in sight—more of us are joining the ranks of the underwater every day. So you will have a lot more company underwater. How comforting . . . I think NOT!
It’s Getting Crowded Down Here
In addition to those already underwater at the end of 2009, another 2.3 million mortgages were approaching negative equity situations—called “near negative equity.” This is the term for those lucky folks who have 5% or less of equity—or you could call them the foreclosures of tomorrow. If you take these homeowners into consideration, almost 29% of all residential properties in the US were underwater nationwide. Now we’re getting close to there being one out of three people in this situation. It’s getting really crowded down here in the ocean’s depths! That’s not all. One out of ten homeowners owe at least 25% more than what their house is worth. So if you have a house worth $200K and you owe $245K or more on the house . . . CONGRATULATIONS! You are one of the (un)lucky ten percent.
How Did You Get Underwater? While we weren’t looking, an earthquake touched off this giant tsunami hurtling toward us. It was called the total collapse of the real estate market. It came out of nowhere!
It was 2007. The real estate bubble had burst. Too many investors, too many easy loans (or really too many naïve people signing their lives away because they didn’t crunch the numbers, were unrealistic, or were just flat out being emotional), too many adjustable-rate loans: 3/1’s, 5/1’s, and the diabolical “Option” ARM (adjustable rate mortgage) that had a negative amortization component to increase cash flow but which also increased the principal owed. Too many greedy loan originators who only had their bottom line in mind. It was a confluence of factors that created the perfect storm. And we’ve been reeling from it ever since. Because people stopped buying homes, the prices started dropping and continued dropping and dropping some more! Hold on tight, folks . . . the ride isn’t over yet! Surely, many of us thought, the declining real estate values would have to stop dropping sometime!
We Were Wrong!
Prices have been steadily dropping now for about three years. Yes, we can still HOPE that we are at the bottom. But with foreclosures not slowing down, we could be wrong about that. We’ve been wrong before! So here you are sitting in the home you paid $245K for. Suddenly houses just like it—even down the street—were selling for $225K, then $205K. Today, it could be as low as $175K—and it may get even lower. Meanwhile, you still owe the bank for whatever portion of the $245K you borrowed. This is the most common way to find yourself underwater. Another way is to have borrowed on your home. You know, back in the days of easy credit! The banks were more than willing to loan you money on the overinflated value of your home—or give you a second mortgage or a line of credit. Well, just as in the example above, when home values drop—you’re at risk of going under.
What Being Underwater Means to You
So what does all of this mean to you? You can’t sell your home—unless you’re willing to OWE money at closing. And you can’t refinance, either—no bank is going to loan you more than what the house is worth.
Yes, you guessed it . . . you are STUCK underwater with your current home—and your current mortgage. Like it or not!
It’s not just you that suffers, either. As we well know, the entire real estate profession—most notably, realtors—are suffering right along with you, perhaps even more so.
But here’s some good news! You are NOT powerless.
There are things you can—and should—do to protect yourself and your finances. Things that will get you back in the driver’s seat—and out of the cold, murky water!
Because we are real estate professionals—and previously owned some seriously underwater properties—we know what we are talking about. We’ve been through it and we got out of it. We can help you get out of it, too!
First, let’s look at the typical paths that most underwater mortgage holders take.
Stay in the House
If you’re one of the lucky few able to continue making payments on your underwater house, you can remain there. In fact, the drop in your house’s value doesn’t affect you too much. As long as you have a fixed rate mortgage—where the interest rate you are paying remains the same for the life of the loan—you won’t see a rise in your payments.
Move from the House
But what if you have to move? Or you lose your job? Or you have an ARM that is resetting? Huh? A what? Yes, it’s possible to have the amount of your payment increased—thanks to nifty and seemingly harmless loans called ARMs. But watch it—at the end of that “ARM” is a fist that will sucker punch you in a few years! In fact, ARMs are the reason that we haven’t even seen the worst yet. Why is that? Simple.
The largest number of mortgage loan products sold in 2005, 2006, and 2007—the prime boom years—were 5/1 ARMs. These 5/1 ARMs are adjustable-rate mortgages that have a fixed interest rate for the first five years and then “reset” after that.
Reset? Sounds like a good thing, huh? ABSOLUTELY NOT!
The amount of interest you pay will reset—most likely to a higher amount.
Which means your house payment increases. Which means you may no longer be able to make that higher house payment. Which means—you guessed it—you are in the same situation as millions of others with underwater mortgages—namely, unable to keep up the payments. Now, if interest rates go down—great! Your payment will actually decrease. But guess what? That’s not what experts are predicting and it’s not what’s happening now, either. With headlines such as “Inflation Warning Etched in Steel,” you can bet we’ll be seeing even higher—probably skyrocketing—interest rates. It’s only a matter of time—and most likely sooner rather than later.
And here’s the kicker . . . 5/1 ARMs reset EVERY YEAR!
So from 2010 to 2012 (that’s right, starting this year), these 5/1 ARMs will experience their first reset. Which will continue to prolong this colossal mess . . . and cause another ocean of foreclosures! Now, if you have an ARM, you are more likely to default on your mortgage—eight times more likely than those with a fixed rate loan according to a recent Harris Poll and currently over 40% of those with an adjustable-rate mortgage are 90 days past due—or more.
Don’t know if you have an ARM? Check the paperwork. Call the mortgage holder. You can find out one of these two ways. Now that you have a somewhat clearer picture of the situation, you may be asking the perfectly natural, somewhat panic-stricken question: What on earth do I do now? Take a deep breath and put your goggles on. Let’s have a look at the traditional options available to underwater homeowners.
The Loan Modification—aka “The Loan Mod”
With a loan modification, the lender agrees to modify all or some of the terms of the mortgage. This is a process where the existing note is modified . . . but not cancelled.
Changes to your loan can include:
Extending the term—Let’s say you have a 30-year mortgage—meaning that if you made all the payments as agreed you would have your home paid off in 30 years.
Well, if presto-chango—that loan is suddenly stretched out to a 35- or 40-year term, your monthly principal payments go down (notice I said PRINCIPAL—not interest—payments), which reduces the total monthly payment amount. . . for the time being.
What do we mean “for the time being?”
Simply this: If you have an ARM—and interest rates climb as experts almost universally agree they will—your payments will increase again. Tricky, huh?
Changing the monthly payments—Another way of extending the term of the loan is if you pay for the house longer, which lowers the monthly payments. But you won’t owe less. In fact, you’ll end up paying more for your house in the end—because you are paying interest for a longer period of time.
Changing the interest rate—This will also lower the amount you pay per month. Your house payment is principal plus interest, so if you lower the interest, you lower the monthly payment amount.
Be careful, though . . . you may still be subject to higher interest rates down the line unless your mortgage holder takes the rare step of making your ARM a fixed-rate loan.
Notice a pattern here? Your mortgage holder has all sorts of clever tricks to change the amount you pay per month, but they will rarely change the principal balance.
You STILL owe more than what the house is worth, and if you stay in the house, you will end up paying that ridiculous amount plus even more, because the amount you are in arrears is tacked onto the back end of the loan. As you can see, we don’t hold much faith in banks and mortgage holders voluntarily hurting themselves to tip the odds in your favor! Plus, loan modifications are just a band-aid to put over an infectious wound, prolonging the inevitable disease—a short sale (see below).
They keep the payment low for three to five years; then the mortgage resets to your old terms, PLUS the unpaid default amount gets tagged onto the back end of your principal—hmm, what a great deal.
Yeah, right. They are playing off your emotions and short memory here—banks aren’t stupid. They will give you hope by negotiating a lower payment for a while—but then rape you on the back end. Or, the rate will increase after a few years, and you end up paying them all of, or more than, the original note.
Here’s the kicker: Very few people are approved for loan modifications. Most recent numbers are only 2.8%—not even 3 measly percent! Also, 51.5% of the miniscule amounts of people who are actually approved default again within nine months . . . and then face a short sale or foreclosure anyway! Which brings us to the next option.
The Short Sale
A short sale has nothing to do with an expeditious sale of your house. A short sale is very, very, very long in terms of timeline! There is nothing short about a short sale.
A short sale is quite simply a sale where the bank takes a “short” payoff when you sell your home—they accept an amount less than the amount owed on a home. This is a simple explanation.
To elaborate further—the loss that the bank takes from the principal owed may or may not be forgiven. Meaning you may still owe money at closing. Got the extra cash lying around to take to the closing table? I didn’t think so! To make it even more complicated, the laws vary depending on which state you live in. Arizona, for instance, is a “non-deficiency” state (meaning the bank can’t come after you for the remaining balance after a short sale).
Here’s the catch: the criteria to qualify. Check this out: The home must be your primary residence. The loan must have been purchase money, defined as the existing mortgage(s) or loans(s) you purchased your home with (this can be a first and a second but both had to be obtained when you purchased the home). The home must be a single-family residence on 2.5 acres or less (another example of the government involvement making things difficult—because the definition here gets very muddy).
So, I’d say short sell your underwater home—OR live in it as long as you can and give the bank the keys. In fact, a better strategy is to short sell it just to prolong the foreclosure—short sales take so long that you may live in the home for free for over a year or more before there is an “agreement for sale” (notice from the bank that your short sale has been approved).
Deed-in-Lieu
At first glance, a “deed-in-lieu of foreclosure” seems like a fast way out. But it’s not.
You give up your rights to the house—basically giving it back to the bank. But of course, you lose whatever you have invested in the house and the lender also has to want to accept your house . . . and believe me, they don’t want it! Here’s the thing that will come back and pull you even further underwater when you least expect it. If the mortgage company sells the house for less than what the loan amount was (and let’s face it: they will), then you owe the difference! They can file a deficiency judgment to collect the money. It depends on your state's laws and whether it's your primary residence or not. (To be sure, check with an accountant or a real estate professional in your area. Most of all, don't stress–we can help you find a certified short-sale Realtor who specializes in your area. Just contact us).
Not only can they go after you to pay back the deficiency (or shortage), they can report it to the IRS on a form 10991 as income! “Phantom” income if you will—income that did not exist. A good accountant may be able to wash away this 1099 (if certain rules fit your circumstances) claiming insolvency and, of course, filing bankruptcy is always an option. Filing bankruptcy is solely a business transaction (businesses do it all the time). There is nothing emotional about filing bankruptcy. While this is easier said than done, if filing bankruptcy makes sense on paper, then do it! It is a miserable thing to go through, admittedly, but it is usually pretty quick, and when it’s over there is an amazing sense of relief to be able to start over! So you’re not off the hook, and you had to vacate your home immediately. A deed-in-lieu is not such a great deal after all, huh?
1Note: 1099A and 1099C—there are two different types of 1099s:
1099 A—Acquisition of property through a deed-in-lieu, or foreclosure, and 1099 C—Cancellation of Debt (Short Sale)
Foreclosure
If you’re stuck making payments you can’t afford and selling or refinancing is not an option, foreclosure is typically the outcome. Foreclosure is where you stop making payments and the banks go through a lengthy process resulting in their ultimately repossessing your house. Your credit takes a hit—and a deficiency judgment can still be filed. (Can’t get away from that pesky thing, can we?) Realty Trac tells us that there were a record number of foreclosures in 2009. No surprise there! A foreclosure notice was served to 2.8 million properties in the US—which was up 21% from 2008 and 120% from 2007. 2010? It isn’t looking much better so far!
The early data is showing increases in foreclosures, especially in foreclosure hotspots like California, Nevada, Arizona (that’s where we live), and Florida.
If you are the proud one in ten homeowners with a mortgage amount that is 25% over your home’s value—watch out! You are much more likely to have your house foreclosed on than if your mortgage were only, say, 5% over the home’s value. The problem is that as values keep dropping, you might just get there sometime soon.
Beginning to think you are screwed no matter what you do? Sure looks that way, doesn’t it? But there are still ways to position yourself to the greatest possible advantage—so that you and your family can emerge in a stronger position than before. We know because we are real estate professionals and because it happened to us—we found ourselves in the same situation so many other homeowners have faced, are facing now, or will face in the near future–only twelve-fold!
It Happened to Us
As realtors, we did what we were supposed to do. Sell houses and invest in them. By following that conventional logic, we ended up as underwater mortgage victims—on a scale much larger than what is typical! Let me explain.
We had 12 properties underwater. That’s right—take your one house and multiply it 12 times! Talk about overwhelming! We also had over $1 million of our own hard-earned personal cash equity in those properties that we walked away from.
We can see why people get mesmerized by the sheer enormity of a tsunami wave coming toward them and stand there gazing at it instead of running like hell. They are transfixed by the sheer size of it all, the magnitude—even if for only a moment.
One day, though, we wisely decided to turn around and start running—and we have never looked back!
Our Turning Point
It was a normal Tuesday and I was paying bills.
Picture this—we had an amazing number of monthly bills. All the first and second mortgages, utilities on three houses (our primary home and two “second homes”–one in Carlsbad, California, and another on Hilton Head Island in South Carolina) and on vacant rentals (properties in between tenants), all the business lines of credit, all the credit cards I had leveraged my development project against . . . I spent probably ten hours a week just writing checks!
There was nothing special about this particular day, other than I hadn’t slept the night before and I decided to take a good hard look at our entire portfolio—everything, each home individually, our income, our cash flow, our fixed and variable overhead, our IRAs, 401Ks, etc.
Then, as if I got hit on the head with a tack hammer, I suddenly realized that I was using all the resources we had (in many cases these resources were really just more debt) to stay afloat instead of facing the reality that we were not going to be able to sustain everything for much longer and that I had to start looking out for myself and my family. I did an absolute 180 that day.
I realized that we were going to lose everything, and in that moment, a surreal calmness came over me—I was suddenly 100% at peace knowing that all our material possessions would be stripped away. There was also an amazing feeling of liberation or freedom. Now I knew that we needed to start saving every dime we could to be able to start over. I knew we needed to start thinking about our family and not the rules of the banks. It was all just stuff anyway . . . it was meaningless really.
The economy and the real estate market were so bad that I realized that all of our “assets” had in fact become “liabilities.” They were never going to help my family and me be able to secure a comfortable existence anyway. This turned out to be an amazing day. I felt rebelliously irresponsible . . . but at the same time completely relieved!
The epiphany can be summed up like this: I just stopped worrying about all of the rules set by the people we owed money to—and started worrying about protecting and increasing the cash and valuables that we had. At the same time, knowing how things work, I was determined to use the system in every way possible and milk it for every penny I could. Why? So that we could restart when all the smoke cleared and it worked beautifully!
Of course, at first, I tried the typical avenues. I even tried to modify one of my jumbo loans. You see, we had a 6,200 sq ft palace on an acre lot with a backyard paradise; a huge Pebble Tech pool; a Jacuzzi; a guest house; a theater room with a 6 ft by 4 ft screen; a game room with a pool table, foosball table, and ping pong set-up; a 6-car garage which, of course, I filled with Porsches, Harleys, a Jeep, a Mercedes, a Hummer, a 41 ft RV, and more; a master bathroom complete with a very important piece of porcelain known as a bidet (if you don’t know what a bidet is, I am not going to explain it to you—it was “French” to me also when I bought the home). As you can imagine, we really wanted to keep this property!
So I did what a lot of normal people would do as a first step . . . I called our mortgage company to negotiate a loan modification. The clerk on the other end of the phone asked me 85 questions about how much our phone bill and other monthly utilities were (which to me was insane—I was calling this person to negotiate a modification on a $1.4 million loan, and she wanted to know how much our phone bill was!). After about 45 minutes on the phone, she said, “Hold on a minute, I will see if you are approved.” So I waited another 45 minutes. She finally came back, said, “You do not qualify at this time,” and promptly hung up on me. As an experiment, I called back the very next day. I went through the exact same phone conversation with another clerk, and after about an hour-and-a-half, he came back on and said, “Congratulations, Mr. Gragg, you are approved! We will be sending you your loan modification documents in the mail shortly.” That was in November of 2008. As of July 2010, I have not received the “modification offer” in the mail as promised!
Meanwhile, we have been collecting rent on that home to the tune of $2,000 per week for the last year-and-a-half without paying the mortgage . . . are we taking advantage? I don’t think so. I am doing what I have to do now—I am looking out for my family and myself. Who knows? Maybe the modified loan documents will actually show up sometime this year! I’m not holding my breath. I have to admit, though, if we actually had a loan modification approved—we would probably sign it, send it back to the bank, make a monthly payment or two, then default again, and keep the home for another year or two for free. You see, we are already at peace with losing the home.
This whole sordid mess set us on the path of figuring out how to cope. Guess what? we figured it out, and in just a little bit, we’re going to share our strategy with you. If you’re underwater, we’re telling you right here, right now, that it will work for you. Flawlessly, just like it did for us. But before we do that, we’d like you to get to know us a little. Maybe if you understand a little bit about who we are and how we think, you’ll realize that we’re probably very similar to you and that our solution will work for you too.
CHAPTER 2 - A Long Strange Trip, Part 1
Bud’s Story
Have you ever seen the movie Fast Times at Ridgemont High? If not, you should—it’s hilarious. Sean Penn’s character in the movie was named Jeff Spicoli. Jeff had no respect for time. He went surfing every day before school—and if the waves were good, he skipped school until he had had enough. In fact, he only showed up at school whenever it was convenient for him! Not only was I Jeff Spicoli in real life, but the actual character in the movie might have been modeled after me—literally. Perhaps you see the resemblance.
World famous Hollywood Director Cameron Crow spent the entire year at my high school (Clairemont High School in San Diego, California) undercover, doing research for his 1981 book Fast Times at Ridgemont High: A True Story, about his observations of the high school and the students. The young cast included Nicolas Cage (credited as Nicholas Coppola for the only time in his career) in his first feature-film role. It was also the film debut for Eric Stoltz and provided early roles for Anthony Edwards and Forest Whitaker. Crowe's girlfriend (and later his wife), Nancy Wilson of Heart, has a cameo as "Beautiful Girl in Car," and, of course, two-time Academy Award winner Sean Penn as our hero Jeff Spicoli!
I looked exactly the same as Jeff Spicoli back then (well maybe not exactly). Sun-bleached long, blonde hair—and not a care in the world. I was also a terrible student and didn’t go to class any more than I had to. I was 16 years old, and the beach was much more important! At a very young age (obviously), I was certifiably unemployable . . . and I didn’t even know it.
I went to four different high schools. My parents were divorced when I was 14. My mom couldn’t handle me, so she shipped me off to live with my father in Lexington, Kentucky. The LAST PLACE a surfer kid from “Cali” wanted to go was Lexington, Kentucky! I was enrolled in a private Catholic school—my father got baptized so he could save money on tuition. What a scam! It was my reformatory era. Ha! I never partied harder than I did at that private Catholic high school. I did play soccer that year, and our team came in second in the state championship (we lost the final game after double sudden-death overtime—very exciting)! I was captain of the team. My work ethic in sports was unwavering, and I was always the hardest working guy on the field. I am not too sure why I didn’t have the same drive with my studies. Perhaps I had a problem with people telling me what to do, or maybe it’s just that there was nothing to win!
My father stuck me in public school for the second half of my one-year jail sentence in Kentucky. Hmm . . . Maybe the Catholics finally discovered that he wasn’t actually Catholic! This was the third of four high schools I attended. Which in itself is sad. I had many, many short-lived friendships. I am now a father, and I realize how important it is for kids to have stability. My two boys will grow up attending one high school. Anyway, I always had a job after school—sometimes more than one. These jobs included working in a bakery (which lasted about one week), scooping ice cream at Baskin Robbins, replenishing the snack shops with ice and hot dog buns at San Diego Jack Murphy Stadium (I actually enjoyed this job because we rode electric carts around and flirted with girls at the baseball games), selling for “Herbalife” (the infamous MLM), washing dishes until 2 am at a French Restaurant in downtown Lexington . . . it is a ridiculously long list.
One job is worthy of special mention, though. I once had a job waiting tables at a popular franchise restaurant for a few months. My boss was such a jerk that I decided to quit—but I waited until the busiest Friday night we ever had. When every table in my section was full and I could barely keep up with all the orders, I calmly removed my apron and nametag, handed them to my boss without saying a word, and just walked out of the restaurant never to return—ah, sweet revenge! Life is too short to be mistreated.
Well, maybe there were two jobs worth mentioning. To put this into perspective a bit, I was 16 and a junior in high school. I hated living in Lexington because I had been uprooted from my beach life. I worked two jobs after school, which was crazy (I think I just didn’t want to be at home). I went to school from 8 am to 2 pm; I worked at Baskin Robbins from 3 to 7 pm, and then I washed dishes at a French restaurant from 8 pm to 2 am! Yes, at a very young age I was nuts!
I was working at the restaurant one night, and as I was cleaning up around the kitchen, I saw that there were three boxes of blue-tip matches by the stove. One of the three had only a handful of matches in it, and the other two had many more, so I grabbed that handful of matches and threw away the extra box (I was going to combine them all or “marry” them). I then got sidetracked with some overflowing water in the sink. Reacting quickly, I put the matches in my pocket and saved the kitchen from flooding. I, of course, forgot about the matches, and hours later, when I was reaching to hang up some pots and pans, my pants rubbed against the stove, and you guessed it—the matches ignited in my pocket and my pants were literally on fire! I remember this like it was yesterday – I saw and smelled smoke before I felt the pain (like Wiley Coyote in the Roadrunner cartoon) I then stripped my jeans off in 0.3 seconds, ran to the bathroom, and drenched my leg with water.
Ok, that story has absolutely nothing to do with helping you or anyone else get out from under an underwater mortgage; I just thought it was hilarious! To this day, I have a scar on my left leg in remembrance of that night.
Until I was 28 years old, I had no direction whatsoever—and it really didn’t bother me. I had the world in the palm of my hand—and no one could tell me otherwise.
I was singing in a band, disc jockeying for weddings and the like, working at Costco (then Price Club – their very first store on Morena Blvd. in San Diego) and at two hotels as a banquet waiter. Of course, I always found time to surf at least once or twice a week!
At the time, I was living with two buddies in a two-bedroom apartment in Pt. Loma, California—five blocks from the beach—and struggling to pay my $325 share of the rent each Month. In the very back of my mind, I was wondering if this rollercoaster of a life was ever going to end up with some sort of stability.
Tom Davy, one of my roommates (and to this day good friend), got a job as a flight attendant at Southwest Airlines. After about a year of seeing his lifestyle—working three days a week, making four times what I made, and having plenty of free time to surf and take guitar lessons—I had a stupidly obvious epiphany and asked him to recommend me for a flight attendant position. He did. A few months later, I was off to training in Dallas, Texas.
For the first time in my life, I felt like I had a career-oriented job, a way to get stability into my life! I took this challenge head on. I not only made it through training—I was actually elected president of the class.
I started flying, made it through probation, and mastered the system of maximizing my hours to make the most pay. You see, you bid for your schedule at the airline—and you can be really diligent and make the job as productive as you want. The average assigned monthly schedule was about 80 trips (or 80 hours); I generally averaged about 200 hours a month! For a while, I also held the company record for the most trips flown in a month . . . 294 trips. Is there a personality pattern here? An overachiever starting to emerge?
Flying was the most fun I ever had at a job or anywhere for that matter—for about two or three years. The company was fantastic. They were very good to all the employees, the people you met daily were incredible, and the benefits were amazing.
You could take free flights anytime—from the day you were hired. You had medical, dental, and vision benefits. You had a 401k—and a dollar-for-dollar company match up to 6% . . . and stock options, too. To this day, I have fantastic memories of working there.
After about three years, though, I grew restless. What I now know to be my entrepreneurial spirit was screaming, lusting for more . . . something different, a new challenge. My job at Southwest Airlines had grown boring and mentally numbing (especially because I flew so much). I was so bored that I would spend all my free time running long distance and reading. I would go to bookstores in towns that we would overnight in and get books to read. I developed a personal obsession to find a way out . . . a way to replace my current income outside of working for the airline. I found myself gravitating to the investment books. In particular, books on money and real estate—how to get it, keep it, avoid paying taxes on it, and how to retire at 50 wealthy—stuff like that. People used to actually make fun of me for not reading the latest trashy novel or current tabloids. By the way, I wasn’t alone. Every flight attendant that I knew was looking (and I am sure many still are) for a way to supplement or replace their income.
When you get right down to it, flying is a strange lifestyle. You are like a gypsy—here today, gone tomorrow. You have countless “single-serving friendships”. You are always away from home. Always alone in hotel rooms for up to 20 hours at a time—many times not knowing where you are, let alone what time zone you’re in. I used to say to myself on the plane, “If I could make $100K a year elsewhere, I would quit.”
After five years of flying, I had read so many real estate investment books that I was probably more educated than anyone with a college business degree!
At first, this whole subject had just interested me, but then I really started to understand exactly what all these authors were talking about. I thought to myself, “I can actually do this!” I mean, the proverbial light bulbs were going off daily.
Five years into being the best flight attendant I would ever be, I needed a change. I needed a serious break from all the mind-numbing hours I was trading for money. So I did exactly what you would expect me to do: I decided to take six weeks off and bicycle across the United States! I very strategically bid for a work schedule around my four weeks paid vacation to arrange for eight weeks off, and I flew to Seattle, Washington, with my bike and pedaled toward Asbury Park, New Jersey! This was by far the most incredible thing I have ever done to date and is a story in itself. But the point to be made
here is that I embarked upon this amazing journey with the idea that, when I returned from New Jersey, my batteries would be re-charged, and I could go back to work with a new attitude.
The plan failed miserably—I arrived in New Jersey and wanted to turn right and cycle down to the Florida Keys, but duty called and I returned to Phoenix to go back to work. I boarded the plane for my very first flight on my very first day back on the job after this amazing two-wheeled adventure, and right then and there, I had an earth-shattering epiphany. I remember it “plane” as day (pun intended)–I was done flying! My heart literally sank. I was upset about it, too; this job that was once so much fun had run its course, and I could not dredge up another ounce of energy to put toward this mundane existence.
The next day, I walked into a Century 21 office and asked the broker to “scholarship” my tuition for real estate school with the understanding that I would come to work for him. He agreed, and I enrolled in real estate school that very day to get my license. I had a deep-seated desire to invest in real estate and duplicate what all of those authors had done.
By this time, I already owned two homes. At my primary home, I rented three rooms out to five flight attendants—and that more than paid my mortgage. I was living for free! I also had a second rental home two blocks away that was producing cash nicely.
Less than two months after enrolling in real estate school, I had a license to sell this amazing commodity! The day after getting my license, I had two buyers to show homes to. My first month in business, I had four deals in escrow . . . and had found my new calling. The funny thing is, I got my license to buy investment properties for myself . . . but I ended up selling for a living. Why? Because I knew so many people at the airline who already trusted me as a knowledgeable resource for the biggest transactions most of them would ever make.
My first year in real estate, I netted $85K in commissions; my second year, $120K; and my third, $180K. It just kept getting better and better!
I was in the top ten percent of realtors nationwide for five years straight–this is quite the accomplishment in one of the lowest-priced markets in the country!
The entire time, I never lost sight of why I got into the business in the beginning: to invest in income property and by 2000, I had 15 properties. They were all producing cash flow and appreciating. As soon as one appreciated enough, I would pull out some equity and purchase another home. I had achieved $250K to $500K per year in business income and did not pay any federal income taxes because of the tax benefits from being self-employed and owning so many rental properties. I had become a seasoned professional at leveraging real estate and teaching people how to do it themselves to create wealth while avoiding paying exorbitant taxes—just like I learned in all those books!
2002 was an especially exciting year for two main reasons (and a third not so exciting reason) . . . First, in 2000 I had a high-end client who purchased an amazing home from me for $825K. That had been my biggest sales commission to date—I bought a Harley with the money!
Two years later, they were back. They contacted me to list that home . . . and to sell them a new bigger one!
I listed the home they were living in for $975K (yep, that’s right. $150K appreciation in two years). Then, I sold them their new home for $1.2 million.
This one client was going to be $2 million in sales alone—a potential of $90,000 in commissions earned. This is a good phone call to get!
I had found them their new home. It was being built. Their old home was under contract (in escrow). I had brought in the buyer myself so I “double dipped” it, meaning I got both sides of the sales transaction! As we were nearing close of escrow, however, the buyer of the first home got in a fight with his fiancé (let’s just say she was “high maintenance”) . . . and cancelled the deal! This is how things go down: People get cold feet at the last minute and something happens. It’s like getting married in Vegas and then waking up. Or like the story of the married couple buying a house in Phoenix and moving there from Tucson. On their way to Phoenix with 2.5 kids and a dog in their minivan, towing a U-Haul with everything in it, they stop at a casino with their cash down payment! I can hear the husband saying to the wife, “But honey, if we win we could pay cash for the house!” Of course, the money is gambled away, and they have no choice but to retreat to a friend’s apartment back in Tucson and save money to eventually rent their own. Of course, hanging the seller, the lender, both realtors, the escrow agents, the inspectors, and everyone else involved in the real estate transaction in Phoenix out to dry—true story! So although the buyer cancelled, my client moved into their new home while their old home went vacant—still costing them monthly. They were carrying two homes and getting very concerned (it was also August, so the pool was turning green).
I would lay awake at night trying to figure out different strategies to sell this amazing home. Finally, I came up with the solution . . . I put together a proposal to purchase it myself, using a wrap-around mortgage.
The deal went like this—
The problem:
Originally, I had the home listed at $975K with a 6% commission.
I had it in escrow at $950k when the buyer walked. My commission was 5%.
Simple math: The seller was going to net about $900,000 before closing costs and pro-rations.
The seller had two mortgages on the home: a first of $750K and a second at $30K . . . meaning they owed $780K total on it.
The seller was going to net after closing about $100K to put into their new home.
The buyer walked, leaving my client stuck with two mortgages—and without the $100K they needed to put down on their new home (I believe they borrowed this money from a relative).
The solution:
I waived all commissions (in lieu of a lower seller carry back) and agreed on a $900,000 purchase price
I gave the seller $10K cash (every penny I had).
I executed a note and deed of trust in the seller’s favor for $890K.
The interest rate was a bit higher than their underlying notes so they had a nice return on the note to me.
I agreed to a balloon payment of $25,000 within six months and a second balloon payment of $25,000 within 18 months.
I also agreed to refinance and cash them out entirely within three years.
We closed escrow . . . and I moved into this amazing 6,200 square foot dream castle. I was like a giddy little high school kid that just scored a date with the head cheerleader!
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People thought I was CRAZY moving into this behemoth home alone! But less than two years later, it appraised for $1.7 million. That’s right, $750K over what the original buyer had it under contract for!
So I refinanced (option ARM), cashed out the seller early . . . and, of course, bought more real estate!
I had put together a fantastic deal (the famous win/win of real estate) on this amazing dream home—a transaction that I would later use as an example to train realtors! I had saved the seller from carrying this home for who knows how long, I got to move into this mansion and celebrate, and I made $800K in appreciation in less than two years. Not a bad deal! I felt like Michael Douglas in the movie Wall Street. And it doesn’t stop there.
That same year I was contacted by another past client (an architect) about building some multi-family projects. I was interested of course!
I had grown bored with owning all of these houses and being a landlord. I was looking forward to learning a whole new facet of real estate. Within a few months, we had two separate projects going. I found and tied up the land until we had a green light from the city to begin building. I sold 11 of my 15 properties to get the capital to begin these projects and was off and running.
I suggested to the two teams that we build four-plex properties. A four-plex is the perfect investment because it is considered a residential purchase. Freddie Mac and Fannie Mae would lend up to 90% on these to the end user, unlike on apartment complexes, which are considered a commercial deal. Banks will lend no more than 70% on commercial transactions. With our four-plexes the investor got four rental units for one purchase price. I just knew that the market was ripe for these “mom and pop” investors. It turned out to be the perfect timing. Remember, the real estate boom years? In 2004 and 2005, I made tons of money and was living large—which was sort of a flash back to when I was 20 years old—again I had the world in the palm of my hand!
In 2005, I bought a four-plex property and in 30 days turned it for $100K profit! That was a good day! Again, I felt like Michael Douglas in the movie Wall Street (I love that movie). In fact, in 2005 the market was cooking! We had 15 buildings completed. I found the land, was a 33% partner on all of these—and was the marketing agent. I had commissions rolling in on top of the profit! It was beautiful, and people were fighting over them—literally. We had a projected sales price of $375K per building when we broke ground, and by the time I had created an auction among all the buyers, we finished at $625K each! I was swimming in money! It was an exciting time! After I closed out those 15 buildings, I immediately replaced the single-family homes that I had sold to begin the projects with more single-family homes. I then rolled the rest of the profits into the next project. The next project was to develop 24 four-plex buildings in a master-planned community, complete with an HOA, a community pool, and a management office. I found a 7-acre piece of land that was perfect. The plans for the land, the artist’s renderings, and the floor plans were all beautiful. I was going to be finished! My portion of the projected net profit on this project was going to be between 3 million to 4.5 million dollars. We could have retired nicely on that! Then the perfect economic storm hit the shore and seemingly overnight we were severely underwater in everything.
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CHAPTER 3 - From Racing to Real Estate
Kristin’s Story
I grew up in Southern California in a conservative, middle-class family with my parents, who have now been married for 46 years, and a brother who is 2 years younger than me. I was always extremely shy as a kid and have battled self-esteem issues for as long as I can remember. My parents never could understand where this self-esteem issue was coming from, and I’m still not sure myself. We lived in a nice neighborhood and I went to good schools, but I never felt like I fit in. I always did well in school, and I discovered I love to dance. I was in dance performance all through high school, but, unfortunately, allowed my low self-esteem to get in the way and didn’t believe I was talented enough to pursue dance in college. Hindsight is such a bummer because I do regret that I never continued dance after high school.
My father raced dirt track midgets on the weekends and I loved racing! For some reason I felt like I fit in with the racing crowd, something I never felt at school. I was popular at the races, but very shy at school—I received the award for “shyest” in my senior class. I had no idea that people even knew who I was in high school! I purposely didn’t try out for cheerleading or attend school football games because they were on the same nights as the races, and I refused to miss a race. My entire life was completely centered on racing until five years ago, when I met the love of my life, Bud. I loved racing so much that I was positive I wanted to be a professional racecar driver. I thought my dad and I would be a great team, with his knowledge of racecars and my determination and desire. If my memory serves me correctly, I suggested this to my dad and he said, "Do as I say, not as I do." So that was it; I didn't consider racing any further as a profession.
In lieu of pursuing a racing career, I decided to date drivers and car owners and stay involved that way. Where there's a will, there's a way, right? My best friend, Kara Hendrick, got the same response from her father when she asked if she could pursue a racing career, but she, on the other hand, took it upon herself to track down sponsors and move forward with racing anyway. More on Kara later .
While we were married, I had the opportunity to travel to many of the racetracks all over the US and meet some very famous drivers and car owners. I became very good friends with Parnelli Jones (1963 Indy 500 winner) and his family. Parnelli has two sons, PJ and Page, who are just a few years younger than I am. In fact, Page was the best man at our wedding when Frank and I got married.
I've been to the Indy 500 five or six times, NASCAR races, and NHRA Drag Races. I was always either in the pits with the drivers or in the suite where the top brass watched from. One time I even got to stand on the catwalk at the Indy 500, with the spotter for our friend, Indy 500 driver Billy Boat. The catwalk is a small platform high above the track outside of turn 3, where the drivers’ spotters stand to communicate track conditions to the drivers during the race. What a rush that was!
As fun as our life together was, it became very obvious to me that Frank and I were not right for one another. I eventually made the decision to proceed with a divorce.
I only had a meaningless part-time job at the time, and there were bills to be paid. I immediately took on a full-time job, but I was making just over minimum wage, which didn't cover my bills plus rent. So I had no choice but to move back in with my parents. I always say that at that point in my life, my self-esteem was at less than zero. Unfortunately, my life was about to get worse before it got better.
Not only was I divorced, making minimum wage, and living with my parents, I found out my job was being moved to Arizona, of all places! At that point, I had no desire to live in Arizona. Funny how things change—I did end up moving there, just one year later, with no job. That’s not all. It got much worse. My best friend, Kara, was killed right in front of me in a racing accident while I sat in the stands with her mom and brother. I was utterly devastated.Kara was my rock, as I was just starting my divorce and having a really tough time handling it. She was there for me no matter what time of day or night it was. I can remember our conversations about my divorce like they were yesterday. She didn’t judge–she was just supportive–and I didn’t know how I could go on without her. This all happened in October 1991. Needless to say, I fell into a severe depression and even contemplated suicide. The entire next year I just felt numb, but through the grace of God, I pulled out of it.
One year later, I was ready to move to Arizona to go to ASU and get my act together–basically to begin a new life! The problem was, I had no money to move. So what's a girl to do? I got very creative and figured it out! I’m a lot like my new husband, Bud—when I put my mind to something, nothing will stand in my way. I will not rest until I figure out a way to accomplish it. I only had three possessions that were worth anything. I decided I needed to sell them so I could have cash to start my new life.
What were the three things I sold for moving money? My wedding gown, my wedding ring, and my beautiful navy-blue-with-white-frets Fender Stratocaster! How wonderful was that? The only thing I wish now I still had is the Fender Guitar.
So, off to Arizona I went! As I crossed the state line from California into Arizona, I remember thinking, "Nobody knows me here. I can be anybody I want to be. I'm not going to be shy anymore, and I'm certainly not going to get involved with any controlling men ever again."
It was just what I needed . . . to move somewhere where there were no bad memories and to be able to change the direction of my life. It was exhilarating, exciting, and very refreshing! When I moved to Arizona, I had no job and very little cash. But I had already enrolled in ASU. My goal was to get a boring (but secure) job with a reputable company, work full-time during the day, and go to school at night for as long as it took to get my degree.
Within one week, I had four job offers! I chose to work for one of the largest nationwide homebuilders, Pulte Homes. I loved it, and coming from California to Arizona, I found that the houses were cheap! I felt like I had been reborn. So, for the next five years I worked at Pulte Homes. I crave stability! This is the polar opposite of my husband, Bud, who loves living on the edge. I began working in their accounting department and worked my way up to payroll and human resources. I went to school at night and was very much looking forward to graduating. I was paying for my own schooling, as my parents could not afford to help me.