Buying a Home is a Partnership for Good or Ill.

By Joel Persinger
YourRealEstateDude.com

Not long ago, I was meeting with a couple who were in the process of losing their home to foreclosure. Their savings was gone and they were suffering emotionally. Neither of them had slept well for quite some time and both were beginning to experience stress related health problems. During our meeting, the husband sat with his eyes closed, brow furrowed and his arms ramrod straight in front of him as he maintained a death-grip on their kitchen table. He looked like a man, afraid of heights, who was being forced at gunpoint to ride his first rollercoaster. After an hour of listening to his wife explain their situation and how they arrived at such a disastrous financial point in their lives, the gentleman finally relaxed and released his grip on the table. Amazingly, his sudden relaxation immediately followed something I said. Since it seemed to work so well for him, I’m going to repeat it for you.

If you own a home and you have a mortgage, then you invested in real estate with a partner. Your partner is the bank that loaned you the money. You invested with the idea that your home would go up in value over time and that you could live there while that investment increased in value. The bank invested in the same way. Just like you, the bank decided to gamble that the investment would go up in value and that money would be made in the form of interest on the existing loan. They also planned to introduce you to new loan programs as your equity increased in the hope of selling you a new loan down the road.

Let’s replace the bank with a friend and see how this actually works. Say, for example, that you want to buy a duplex so that you can live in one unit and rent out the other. You only have enough money to pay for part of the duplex, so you need somebody to go in with you in order to be able to do it. You and your buddy decide to do this together and you both plunk down your money on the property and pay all cash. As part of the agreement, you get to live in the property and you and your buddy split the profit derived from renting the second unit. Since your buddy doesn’t get to live there, you both agree that he will have the right to sell the property and keep the money, if something goes terribly wrong.

Everything seems to be going along fine, but suddenly the hillside in the backyard collapses and destroys the duplex. As a result, you no longer have a place to live and both you and your buddy have lost the income from the rental unit. As if to add insult to injury, your property is now worth less than half of what you paid for it, because the building has been destroyed. In this situation, would you be the only one who loses? I don’t think so. Your buddy would lose too. But, you might actually lose more than your buddy. You have to find a job, a place to live and you lost your property in the process. Your buddy, on the other hand, already has a job and a place to live. In addition, he gets to sell the vacant lot to get some of his money back and he doesn’t have to share a dime with you. This is the way it works with a bank.

You and a bank purchased a property together. You both agreed that the property was worth what you paid for it and you both stood to gain if your investment worked out. But, you both took a risk as well and you both stood to lose if things didn’t work out as planned. So, if you lose, the bank will lose too. That is as it should be. While you bear some responsibility for making a bad investment, you do not bear it all. The bank may have invested more than you, but that’s why the bank gets to keep the property and sell it in an attempt to regain some of its lost money. You don’t get to do that.

Now that you understand that your home was an investment and that you weren’t alone in thinking it was a good one, give yourself a break. Every investor makes mistakes. That’s generally how they learn. So, learn something from it and move on. In the meantime, do the best you can to reduce your losses and when bedtime comes each night, leave that day’s guilt behind you and get some sleep.