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Why I am Facing Foreclosure

What happened? Why am I facing foreclosure? Basically, I bit off more than I could chew.

Here is the story.

I started investing in October 2005 and went full-time in January of this year (2006). This is after going to numerous real estate investing seminars, reading books and learning from other investors for the past 2 years. I did my first successful deal in October while still at my full time job. In January I quit my website programming job and went all out!

From October 2005 to May 2006 I bought 8 houses in 4 different states, mostly with the help of 100% stated income loans (liar loans). Most are fixers – I was going to rehab and flip each one within a month or so. Buying was easy, but man was I in for a surprise (or a lesson?).

Eager to Buy with No Experience and No Solid Plan.

Instead of having a plan for getting in, and getting out, I thought I would just “wing it”. You see, I become a “motivated” buyer. I needed to buy and sell some houses quickly because I quit my job and needed to make a living in this business – NOW! They warned us in the seminars NOT to do this.

They told us to keep a full-time job. Work as a “bird dog” for other investors at first. Then start slow. Build your team. Have extra cash saved up. Buy low. Avoid heavy fixers. Do one at a time. Stay local. No traveling. No speculating!

I ignored most of the advice from my gurus…

True, I was not purely speculating. I did buy most of the houses at a discount. So that if the market went up or down, I would still be able to flip it and make a profit. But I did not buy at a big enough discount to cover my lack of experience. Buying low is only one part of the formula.

Since I didn’t have any money, I “juiced up” the equity on most of the houses by getting cash at close. The cash-back was to pay for the holding costs, travel, repairs, etc. So every time I bought one there was a “CHA-CHING” sound and my bank account got fatter. This gave me a false sense of profit and kept me going.

I grossly underestimated everything. I bought many houses sight unseen! And the ones I did see I was still too optimistic. I miscalculated the money+time it would take to find contractors, manage contractors, do repairs, and resell quickly. Add the cost of doing out-of-state deals. I was not prepared for the huge travel expenses and the difficulty of managing all these deals remotely.

Everything went wrong. The rehabs were way behind schedule and grossly over budget. I was too busy flying around the country visiting each job. No time to manage details. I couldn’t sell the houses fast enough. I managed to sell only 2 out of 8, and got stuck with the rest.

The holding costs is what started killing me. Paying 15,000+ per month in mortgage payments and utilities can really drain ones’ reserves. All the cash I pulled out at close is now gone – for repairs, mortgage payments and travel expenses. And the houses are not selling fast enough to keep me afloat.

As the last resort I went for one more cash-at-close deal.

It’s a nice model home from a builder. The builder and I structured a pretty good deal. I would buy the house for full retail value. The builder would pay my closing costs and give me $50,000 cash back at close and lease the house for 12 months. Sweet! I told him I will close with no problems.

I went out to apply for financing figuring I will get a 100% loan just like before. However, this time my credit score took a dive because of all the maxed-out credit cards and credit lines. I kept calling different mortgage brokers, looking at different programs. Finally I found the right program. I was barely qualifying but everything was going smooth.

But then…

They Googled me!

The lender found one of my early blogs where I was talking about investing in fixer-uppers around the country. So they denied the loan! My mortgage broker was really amazed. He has never seen them get so picky and go to such length to investigate the borrower.

The problem is that I was running the loan as a “second home”. Lenders’ definition of a “second home” is for PERSONAL use. Reading my old blog, it was clear that I am buying the home as an investment to flip it. If I ran it as an investment home, I would NOT have been able to qualify for the loan. So I was basically lying to the bank about my owner-occupied status and other things.

Lying about the owner-occupied status and income was easy to do. Seems like every other investor was taking advantage of it. Since that was the only way I would qualify for 100% financing, I too was doing my deals via “liar loans”.

When I was caught, I felt very embarrassed and guilty for all the shady loans I’ve done. My wife never liked these loans. She hates “fishy” business. I knew she was right and I told her I’ll stop lying on these loans – “Just one last one!”.

At this time (July 2006) we had almost $20,000/mo in expenses. I desperately needed $50,000 cash-back on this last deal to buy some time. We already used up over $120,000 of credit card and credit lines and I was desperate. That’s why I still went for this last deal even though my wife and I both agreed that we need to do this business 100% above board.

So the irony is that I was cought through blogging. You’ve heard about people being fired by blogging about their work. Well, I may be the first borrower to be denied a loan for blogging about the deals.

Since it’s all out in the open, I might as well keep blogging, continue being honest, admit my faults, and try to make it right.

Back to the story…

The Last Straw

Since that last cash-back deal fell through I started falling behind on payments on all the mortgages. I ran out of money to finish repairs, pay utilities, credit lines, etc. I ran out of money to live!

Every penny went to float the deals. The credit cards are pretty much all maxed out. Nothing is left.

I got kind of depressed for a week or so. I didn’t want to think about it. The head-in-the-sand type of thing. But now I am beginning to face my problems.

Now What?

My wife is a full time student and I need to put food on the table. Both of our credit is on the line. It will be ruined if I don’t do something quick. I want to avoid foreclosure and bankruptcy and maybe get a little cash by selling my houses. I am not sure how realistic this is.

I may have to get back to a full-time job so I can pay basic bills. I AM grateful to at least have my web development skills to fall back on. I may do some wholesaling or help other investors to make a little money. I don’t know. I’m looking at all possibilities.

It’s embarrassing to talk about this. Yes it’s my fault and I deserve the consequences. It sure is a tough way to learn though. This will teach me to be more responsible and play smart next time.

I started this foreclosure blog in order to talk about my experience. Hopefully this will help you if you’re in the same situation or know somebody who is.

Leave me a comment below. Encouragement, advice, tips, prayers are appreciated.

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