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The Darkest Hours Are Just Before Dawn (Sometimes).

By Rob Lambert - Email Editor

Date : August 7, 2008

Dear Valued Reader,

I get lots of calls from people whose financial worlds have crumbled. Most of the time these callers have suffered for weeks or months of painful trouble, often contemplating their problems on their own without any professional help….always a bad situation.

Last month I was able to help a young couple, both doctors, who bought a fancy house overlooking the Pacific Ocean at the height of the real estate market. They paid a little over $3.5 million dollars for the home and borrowed close to $2.6 million to purchase the home. Since that time, building has stopped in the subdivision and the house has plummeted to less than half of its purchase price. I could purchase an identical house for less than $1,500,000. This couple has also seen a devastating drop in their personal income (both are cosmetic surgeons and boob jobs have dropped to the bottom of the list) and are having terrible trouble keeping their house and their practice going. They have both started supplementing their income by working in local emergency rooms at a small fraction of their former income.

The doctors were very upset. Their decimated salaries just can’t handle the payment obligations on their student loans and the now unwise real estate purchase (not to mention the his and her leased Mercedezes). All of this work, years of school and sacrifice, and they are flat broke ….more than a million and a half upside down.

Why do I call it a hiccup. Simple. These smart, ever educated doctors with financial advisors coming out of their ears never realized that purchase money loans to buy a personal residence do not allow for deficiency judgments in California unless the lender goes through the expensive and drawn out process of pursuing a judicial (court supervised) foreclosure. Most lenders opt for the quick and easy “power of sale” foreclosure which takes approximately 120 days. The one downside of the power of sale foreclosure in California is that a deficiency judgment is not possible.

The bottom line is that the lender who made the loan to purchase the overvalued home is forced to look at the home as the sole security for the loan. This is true even if the property is upside down as in the case of the doctors by more than a million bucks.

These two young doctors went to a local lawyer I referred them to who knows his way around a set of loan documents. In a few meetings the lawyer was able to negotiate a settlement with the lender who got the property back without a fight and without any holdover or bankruptcy issues. The doctors were able to walk away. Their credit is hurt but not nearly as badly as if they were forced into foreclosure. What the doctors did not realize was that the “upsidedownness” in their loan of more than a million dollars was their lender’s problem. By getting a little advice, hiring an expert, and taking steps to deal with their pain rather than hiding their heads in the sand hoping for improvement (a typical response) these doctors removed their biggest problem: the upside down beach house.

They are now concentrating on cutting costs at their practice and getting that back into control; however, this is much less of a daunting problem. They will be on top of this within a few months I am sure.

So, even the worst situations sometimes have silver linings. Yes, it is bad to lose a house and embarrassing to cut back on a fancy cosmetic practice; however, this young couple has plenty of time to get the marble counter tops and the view. For the time being, they are taking on their problems one issue at a time, and they will survive. Who knows, they may even stay married through the fray.

I wouldn’t be surprised if they are back in a year after a little credit repair buying the same model of home for less than half of what they paid the first time. I am sure that they will have solid Asset Protection in place by this time also.

So, when it looks dark, it probably is…. but take the problems one issue at a time and you will find that you slowly but surely get back on your feet. It is seldom as bleak as it seems at 3 A.M..

Have a healthy and protected week.

Rob Lambert

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