You arrive home tired and exhausted from a long day at work only to find the house is empty and very quiet. An envelope addressed to you is left in the usual place where you usually place your things when you arrive home. Opening the letter you find a one page note:
I’M SORRY BUT I JUST CAN’T HERE ANY LONGER. I’M MOVING BACK HOME TO SORT THINGS OUT. TELL THE KIDS I LOVE THEM.
Can you imagine coming home from a long day at work to this letter?!?! Neither can I!
But for Norah this is exactly what happened. This was a serious problem. The spouse, father and income-contributor of the family had just deserted a family that very much depended on him. Norah had to make some hard choices over the next few weeks. Because she had made the purchased the home she was living in prior to getting married, her primary residence was in her name only. After sorting out her situation Norah had approached my colleague with the idea of selling the house for $375,000. She would then downsize into a less expensive apartment that she and her 2 young children could start over. Norah felt she had enough equity to cover two years of rent but still had sizable monthly bills. One of the largest bills was her automobile loan, a stiff $400/month. Norah still owed $9000.00 on the auto loan so the debt wasn’t going away anytime soon. After learning about Norah’s circumstance my colleague could see she was in a tough position. Not just because of her bills, but because of her life circumstance. Loosing the financial and emotional support of her spouse, uprooting her 2 young children, selling the house, moving into new surroundings and into a new apartment. This would be a lot. My colleague sat down with Norah and looked at her monthly budget. There was no question that she earned a good living, but the auto loan was expensive. Looking deeper into the details my colleague found that Norah had the money to cover the mortgage. She just didn’t have much left over after paying all her bills. To provide a solution she suggested that she would be willing to buy the house from Norah with a 5 year option. As part of her down payment, which would be non-refundable she paid off the car note to the bank. She then originated a promissory note with Norah in which Norah would pay her $137/month for the next 5 years. My colleague agreed to reduced the auto loan by $1000 and then deduct it against the Option purchase price she offered. This would keep the monthly auto payment down. Even better, she told Norah that if during or at the end of the 5 years she wanted to buy out the option from my colleague, she could purchase the house back at a price they would agree to, or a 10% increase whichever was less. They agreed to the deal. Norah had to agree to not miss any payments on auto loan and maintain the property(repairs), taxes and insurance. So what did this accomplish for both parties?
-Norah was able to continue to live in her house and keep the children in the same school district.
-Norah was able to sell her house at $375,000 without hassle by accepting the option.
-For the next 5 years Norah can sort out her financial goals without the pressure of moving and starting all over again.
-Norah will still be paying down her mortgage debt so if she sells the house in 5 years she will still have received 5 years of mortgage interest deductions on her taxes.
-For the next 5 years if Norah’s financial situation improves she may buy out the option and repurchase the house – thus never moving.
-Norah reduced her monthly expenses by refinancing the auto-loan with the Option buyer at a more affordable payment which will leave her with more money in her pocket at the end of the month.
– The buyer’s option guaranteed a minimum of a 10% increase on the purchase price if Norah were to buy out the option. A 32% return on investment after paying $9000 to pay off the original auto loan.
-Even if Norah doesn’t buy out the option she agreed to continue to maintain the property (repairs), pay the mortgage, taxes and insurance so the buyer has zero property management issues to deal with.
Although Norah could have sold her home, this solution gave Norah favorable options in which to stabilize her life circumstances to give her the confidence to face her financial challenges from a position of strength.
Don’t overlook WIN-WIN scenarios. The obvious isn’t always the best solution.
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