Friday Financial Foul Ups: Upside Down and Paying The Price

This week’s Friday Financial Foul Up will feature a guest post by Matt Jabs.  Matt is an IT Manager by day and a personal finance blogger by night.  He writes about debt and all things personal finance on his site, Debt Free Adventure.  Matt is also a staff writer at the popular blog Five Cent Nickel and can often be found on twitter (@mattjabs) or on Tip’d.

Matt is one of the hardest working bloggers I know, and I was thrilled when he told me he was willing to write a “foul up” for my site. Enjoy his story and his foul up “acquiring” a home only to have his mortgage become upside down. If you would like to add your own financial foul up to this series, please contact me here.

Circa 2005: My wife and I were closing on our first home together just days before leaving for our honeymoon. The morning after returning home from our “semi-elopement” we moved into the house and began living together for the very first time. In just two short months we went from dating and living separately to being married, financing our first home, and moving in together. It was a hectic, but exhilarating time to say the least! We lived in our first home for 2 1/2 years before selling it off and financing ourselves into the home we live in today.

The Current Sitch:

It was nearly three years ago now that we sold home 1.0 and financed our way into home 2.0 in the suburbs of Lansing, MI – primarily due to a job change. Though our first house payment was very manageable - if one of us lost our job we would have been able to manage payments – our current house payment does not afford us the same comfort. I should mention that most Americans would probably view our housing situation as quite healthy. Our house payment – which includes taxes and insurance in escrow – is only 21% of our NET income. But I’m not “most Americans.” And although it wasn’t always this way, my goal is to be completely debt free, which leads me to my next point.

The Foul Up:

You may have noticed that when addressing our home “purchases” I never use the word “bought” That was not by accident… We “acquired” both home 1.0 and home 2.0 via the good ole 0% down | 100% financed | bank money. With the first home we were lucky… very lucky. We sold just 2.5 years after buying, and even though it was March of 2007 and the housing market was already crashing we were able to sell for a $12,500 more than the amount we originally financed. Unfortunately, after paying the agents (rolls eyes) we walked away from our house sale with only $2,500 cash. Because we were still lacking sound financial habits, we did not have any money saved up to put down on home 2.0 - but we “bought” it anyway. When we financed home 2.0, because the market was already depressed, our purchase price was around $20,000 less than all our neighbors – who had purchased a year or so earlier (new development sub.) So we thought we were getting a good deal. But the truth is, our home has lost at least another $25,000 in value since we acquired… leaving us upside down and paying the price!

The Lesson:

This is the best part of the post because even though we make bad decisions, most of the time it is our bad decisions that teach us to be better. Thankfully, our situation was no exception!

I recognize now that we had a “thinking problem” when it came to “buying” homes - and most everything else for that matter. The problem lies in the simple fact that we believed we needed things before we could actually afford those things. While living with our parents we enjoyed a certain type of lifestyle, so when we set out on our own we wanted that same lifestyle or better. The thing is, it took our parents 30 years to achieve it… but thanks to financing… it only took us 3 – or so it appeared.

We had been trained to believe that by closing on our homes, we actually bought those homes. That is a lie. We didn’t buy them, we financed them with money we did not have, and will not have for 27 more years. And by the time that 27 years is up, we will have “bought” the house for nearly double what the original asking price was. This is not to say that mortgages cannot be used responsibly for others, but for us we are choosing a new road.

And the good news is… through these experiences we gained much wisdom, and in gaining wisdom we gained passion, and in gaining passion we gained a mission! Starting in January of 2009 we set off on a passionate and aggressive Debt Free Adventure. Our goal is to be completely debt free as soon as possible. We would have already sold home 2.0 if its value were not so far upside down. So since we cannot get out from under the home, we are focused on rapid elimination of non-mortgage debt. Once that is gone, we will move on to the 2nd mortgage, then the 1st mortgage. And once that 1st mortgage is gone… we will be completely debt free. Having a solid financial plan is akin to having no debt at all. Why? Because now that we have our plan in place, we know it is just a matter of patience and perseverance!

———-

Do you like this series? Check Out The Previous Foul Ups:

Foul Up #6 – Brian (MyNextBuck) – Overdue Books Prevent Me From Renting an Apt
Foul Up #5 - Kelly Whalen (The Centsible Life) – Poorly Planned Vehicle Purchase Costs $24,000
Foul Up #4 - Stephanie (Poorer Than You) – Signed My Life Away at Age 17
Foul Up #3 - Deliver Away Debt – How I Wasted Over $10K and 11 Months
Foul Up #2 - Brian (MyNextBuck) – Quick Fixes to Weight Loss
Foul Up #1 - Brian (MyNextBuck) – How I Didn’t Earn $3000 in Free Money

21 Responses to Friday Financial Foul Ups: Upside Down and Paying The Price
  1. Jeff
    October 30, 2009 | 6:28 am

    Matt,

    Oh how I love to hear that other people are in the as boat as me (no I’m not someone who likes to see people in pain, it’s just nice to know I’m not the only one :-) ). Thanks for taking the time to share your FFF. I’m currently underwater too, I live in Michigan and have seen my house’s value drop over $40,000 this past year. I use to think that I would need to attend SCUBA classes to learn how to breath while underwater. But as you have, I to have taken to the offensive and I’m ATTACKING the debt. By taking the offensive and taking responsibility to eliminate the debt, I’m learning to breath without those expensive SCUBA lessons. I’m sure we’ll never make the same mistakes again. Best of luck crushing it.

  2. Peter
    October 30, 2009 | 6:35 am

    Isn’t it interesting that even buying a house – what many people would have thought was a sure investment a few years ago -is no longer a completely safe option? We bought our house at the height of the bubble in 2006 for 273k. Now, only 3 years later our house was appraised at 232k when we refinanced. Ouch! Luckily we had put down 20% on the house, so we’re not underwater, but it’s still painful to see that hit that we’ve taken. The importance of a good financial plan before jumping into home ownership can’t be understated!

  3. Financial Samurai
    October 30, 2009 | 6:41 am

    Thanks for sharing Matt! I’m sure you’ll look back on this event and just smile 10 years later when it’s all paid off. A home is a home is a lifestyle!

    Best, FS

  4. David @ Money Under 30
    October 30, 2009 | 7:08 am

    Sounds like a classic “learn the hard way” story, Matt, but at least things didn’t turn out as bad as they could have. A lot of people who bought similar homes are really hurting right now.

    And I love the line: “we believed we needed things before we could actually afford those things.” That’s probably the key to almost every financial foul-up we make!!!

  5. Karthik
    October 30, 2009 | 7:29 am

    I guess it takes some kind of courage to own up to your mistakes and I have gotta hi-five Matt for that. Having known him as a roommate and a colleague, he is passionate about anything he does and it’s no surprise he is showing the same passion towards debt elimination. I am here to see him as a rising star in the blogging world and more importantly achieve his goal of being ‘debt free’.

    Great write up, Matt!

  6. Paul @ FiscalGeek
    October 30, 2009 | 11:41 am

    Matt I swear you are my Lansing based doppleganger. The similarities are uncanny. Who doesn’t buy two houses Zero down? I did the same even after coming out upside down on our first house when we sold it for a job move. It just took me more work to get upside down in our current house, but here’s for second, third and fourth chances. Freedom is not so far away with a plan.

  7. Matt Jabs
    October 30, 2009 | 1:59 pm

    Thanks for all the awesome encouragement…

    Like Paul mentioned in his comment, and I mention in the post… having a plan is key. Now that my wife and I have our plan in place, the whole debt freedom thing is on total auto-pilot.

    The message? It can be on auto-pilot for you too… all you have to do is set it up. It only took us about 10 months, and some set up their plan quicker than that. So go do it! :-)

    Cheers all!

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