Three years ago we were forced to let one of our investment properties go into foreclosure.
It was our worst nightmare. We had purchased the home pre-construction in 2006, at the peak of the real estate market (we didn’t know it was the peak at the time). By the time the home was built, it had already dropped in value, and we were unable to rent it for the amount we thought we’d be able to. After running at a negative $1200/month cash flow for as long as we could and sinking a total of $50K into the property, we found ourselves out of money and out of time.
We tried to sell the property.
We even tried to short-sell it, but the lender refused to accept any offers. Eventually we had no choice but to let the bank foreclose.
This was no small decision on our part. Prior to this we had never not fulfilled a debt. Our credit score was excellent. We had always lived within our means. But we were out of options.
Our biggest fears were that our credit would be ruined, we’d be labeled financial “deadbeats” and we’d never be able to get another loan again (not that we were looking to go into any more debt). And frankly it was downright embarrassing. My belief had always been that good people don’t walk away from their financial obligations. What did that say about us now? Also disappointing… our quest for financial independence via real estate passive income had gone bust.
Three years later I’m happy to report it wasn’t as bad as we expected.
And yes, there is life after foreclosure.
- 18 months after the foreclosure we were able to get a tier one auto loan to purchase my leased vehicle.
- We began saving money and paid off our other car loan 6 months early.
- We sold our other two investment properties in 2010 and used the proceeds to pay off debt we had incurred in my 2009 Spellbound search for financial freedom
- We kept saving and were able to pay off my car loan (the one we got in 2010) 18 months early.
- Our credit score is back up over 700, not as high as it was previously, but still a good rating.
- And we were just able to refinance the mortgage on our primary home, cutting the interest rate nearly in half, the loan term by 6 years, AND lowering our payment.
Just three years later we are back on track!
We are now completely out of debt (except for our mortgage) and we’re working on building our savings and retirement accounts back up.
Yes, suffering a foreclosure was a humbling experience.
But as it turns out it was not the end of the world. After fearing our lives would not return to normal for at least 7 years, I’m happy to report we’re better than normal just 3 years later. Our standard of living has remained the same but we spend and invest much more cautiously now. We’re no longer chasing financial freedom. We learned a big lesson and as a result are a lot smarter about how and where we invest now.
Yes, I still have dreams of financial freedom and I work hard in my business every day toward that goal. But I’m no longer placing my trust in “wealth experts” and “gurus.” I’m using my skills and knowledge, and a level head, instead.
If you’ve been through a foreclosure or you’re facing one, know it’s not the end of the world.
Yes, it puts a damper on your life and credit worthiness temporarily, but after the real estate boom and bust over the past few years, rest assured you’re not alone. In fact, foreclosures quadrupled from 2005 to 2009.
Foreclosure is not a decision to be made lightly, but sometimes we’re left with no choice.
The best advice I can give is to get all your financial ducks in a row BEFORE you stop paying your mortgage. You won’t be able to get credit for awhile, so make sure you won’t need it. For example, I knew my car lease was going to be coming to an end about the time we were going to have to stop paying the mortgage on the investment property, so I got a car loan and purchased the car 6 months before the lease was up. Obviously you need to be sure you aren’t going into debt you can’t afford. My plan was to get the car loan and pay it off early, to help to re-establish our credit.
Additionally, find a way to increase your income (I did what I could to ramp up the revenue in my business) and/or cut your costs (we cut a lot of expenses that it turns out weren’t so necessary after all) to rebuild your savings and pay off any existing debt.
Paying off your existing debts, and even using your remaining credit cards and paying them off in full every month can help get your credit scores back on track. In our case, we had a stellar credit report with one “blip” on it. I believe that by continuing to responsibly use credit after the foreclosure, it helped bump our credit scores back up more quickly.
Have you suffered a foreclosure? Are you considering letting a property go into foreclosure?
I’d love to hear your thoughts or your experience. By sharing openly we can help others who have faced, or are facing, this unfortunate “sign of the times” circumstance.
Please post a comment and share.
I share the whole story of how I became Spellbound in my search for financial freedom in my book, Breaking the Spell: The Truth about Money, Success, and the Pursuit of Happiness. The book addresses the role the real estate market and many other factors have played in driving so many people to keep seeking more money and success, along with tips for breaking the spell.