Friday, September 16, 2011

Creative Financing

We’re approaching the two year anniversary of a very nerve-wracking period here. The earliest posts on this blog recount the whole story in detail, but I’ll give the cliff notes version here. Basically, to say we bought the  Einsel House in an unconventional manner is an understatement.

Thursday, August 27, 2009 – Charles and I are the only bidders for the Einsel House when it is sold at sheriff sale. Immediately after the sale we find out there was an attorney who was supposed to bid for the bank, but he basically wasn’t paying attention and never placed any bid.

August 27-September 19, 2009 – Charles and I wait anxiously for closing (which we are told takes 6-8 weeks)

September 20, 2009 – Our attorney gets a phone call from the office of the attorney who didn’t bid at the sale. That attorney offers us $ to rescind our bid. If we refuse he threatens to contest the sale.

A few days later I wrote here, “So in the end we are not that concerned about losing the Einsel House. The main difficulties have to do with time and money. And lack of sleep. I'll elaborate on the "time and money" stuff later…”. Well, it’s two years later, and we obviously did get the house, and it feels now like a good time to finally share some of the details I withheld back then.

Anyone who has read here regularly already knows that we owe my parents (particularly my mom) a huge thank you for all of the help they have provided at the EH, especially during those first nine months. But what regular readers here don’t realize is that we are indebted to my parents for more than just their time and labor. We also owe them innumerable thanks for their trust in Charles and me. That is because much of the money spent on the Einsel House during those first nine months was money borrowed in my parents’ names and borrowed against their house.

Charles and I have always been conservative financially. When we started looking at houses we went to the bank regarding preapproval for a loan. We told the loan officer how much we planned to borrow, he took our information, pulled our credit scores and immediately said, “That will be no problem!”. The bank loved Charles and I, but it turns out we were only half of the equation; the other half was the Einsel House. And the bank wasn’t nearly as enthusiastic about the EH. It made no difference how high our credit scores were; with a patchwork roof, peeling paint, crumbling drywall and no furnace there was no way the Einsel House would qualify for a conventional loan.

Our loan officer said we would probably qualify for a construction loan (portfolio loan I think he called it), but the extra hoops such a loan would require made Charles and me very cautious. As I understood it, with a construction loan the bank would have to review and approve everything we did to the house. We would have to provide the bank with documentation that all work was done by licensed, insured professionals and we would have to have quotes approved by the bank before any work could begin. Trying to renovate the house with a bank looking over our shoulder through the entire process did not sound fun at all.

Enter my parents - who had a house that would easily qualify for a conventional loan. When we brought the possibility up with our loan officer I think he was somewhat taken aback, but he said that from the bank’s perspective it would be no problem. If my parents’ house and personal credit both qualified, the bank really didn’t care how the money was spent. So my parents applied for a home equity line of credit in their names, and with their house on the line. The plan was to use the HELOC to make the repairs needed in order for the Einsel House to qualify for a conventional loan. Charles and I would be responsible for all fees and payments required on the HELOC, and once the Einsel House was up to par we would refinance it in our own names, using the proceeds to pay off the HELOC in my parents’ names.

The paperwork for the HELOC against my parents’ house went through without any complications, and on September 17, 2009 they signed their names opening the line of credit. We were all set for our closing on the Einsel House – until three days later when we suddenly had an attorney threatening to contest the sale.

This added a whole new set of complications to the situation. The line of credit through my parents was set up and ready to go, and from that front we were still able to close and start repairs. But the attorneys I work for cautioned us strongly against putting any money into the house with the possibility of litigation hanging over us. Although they felt that we stood a very good chance of keeping the house in a court battle, they said that if the sale was somehow reversed we would probably lose any funds invested in the building above the purchase price. The courts would say that any improvements we made to the house while it was the subject of ongoing litigation were a “known risk” and if we lost the house we would also lose any money spent on improvements. Legally, the safest thing would be to close on the house, but then not put any more money into it until we were sure we were not headed to court. But it was already late September, and the house in question had no furnace and needed obvious structural repairs. There was no way we wanted to let it sit empty through the approaching winter.

The loan officer at our bank had more bad news. The home equity line of credit through my parents was still there, and the bank still didn’t care how that money was spent. But our loan officer warned us that the bank would never approve a refinance on a property that was the subject of ongoing litigation. This meant that even if we took our chances and made the necessary repairs to the Einsel House we would not be able to refinance it until any possible litigation was resolved. This was concerning for two reasons. First, the HELOC had an adjustable interest rate and we wanted to be able to refinance as soon as possible to secure a fixed rate. Second, Charles and I were planning on a conventional 30 year loan when we refinanced; but the HELOC was based on a 10 year amortization. This meant that our monthly payments on the HELOC were more than double what they would be following a refinance. We were prepared to make those payments for awhile, but being tied to those payments indefinitely was very concerning – especially because it was technically my parents who were on the line.

The attorneys I work for were quite confident that if push came to shove case law would ultimately uphold our purchase of the Einsel House. But they warned that even if we ultimately prevailed in court, it could take a long time to get there. The attorney opposing the sale was the senior partner in a multiple member firm. Even if he knew he would lose, it would cost him nothing but time if he chose to be a thorn in our side (and we had no reason to doubt that he would).

In the end we bought the other attorney’s cooperation by paying him an amount equal to half of his malpractice insurance deductible in exchange for his signature on a "Covenant Not to Intervene or Interfere in Sale." Considering the alternatives it was a concession we felt we had to make. And in the end it did all work out. We closed without complications on the Einsel House on October 7, 2009. For eight months we made payments on the line of credit open in my parents’ names, and in June, 2010 we closed on the refinance of the Einsel House, paying off the HELOC and settling into a conventional fixed rate 30 year mortgage.

It’s a little bit surreal to recall the emotional highs and lows surrounding our purchase of the Einsel House.  If I were making the whole story up I don't think I could have put more twists and turns along the way.  Looking back, I remember the last advice my dad shared with me on the morning of the sheriff sale -  "Just relax," he said, "if it's meant to be it will be".  And in the end, I'm so glad that he was right.


  1. I remember your writing about the whole saga and I remember thinking that it was probably much cheaper to pay off the jerk than to go to court. Since you work for an attorney you know how those fees add up - here in NJ we're billed in 1/10 hour increments with a minimum of 1/5 hour and it adds up to big bucks very quickly. It's usually the one with the most money who wins. It might be time to send a nice gift to the lawyer who made the original mistake, a thank you gift (maybe a kitten?). Then let it go.
    Kathy from NJ

  2. O gosh. And the saga was thrilling and disturbing enough as it was.

    Glad it's all worked out!

  3. The law is not set up to be fair or rational.

    Charles and me in many places.

  4. Kathy - Yes, attorney fees definitely weighed into how we handled the whole thing. Most of the time it's not the money we paid him that angers me the most about the other attorney, it's the mental anguish he caused us. But I periodically try to remind myself that he was not privy to the details of how we were financing the Einsel House and therefore could not know how contesting the sale would complicate those details.

    Anonymous - thanks for the correction! I changed it in a couple of places. :)