A Real-Life Financial Meltdown

Here is a story about friends of ours (no, they don't read this blog and neither does anyone that knows them). It's a combination of bad luck, terrible timing, an historic market drop, and poor decisions. Here are the details:

• We had friends from our neighborhood that lived a modest lifestyle similar to ours. The husband worked in business (sales) and from what I could tell he earned a decent living (he never told me what he made but I'm guessing he was in the $80k to $120k range per year.)

• His company announced they were shutting down their office here. He had two choices: 1) move across the country with them or 2) take a buy-out package. They thought it over (so the package must have been decent) but eventually decided to go. This was last spring.

• They put their house on the market at what I would consider an unrealistic price (we were looking at selling our bigger, newer home in better shape and pricing ours $30k below their price.) Needless to say, the house sat there. And sat. And sat. Over several months they took the price down slowly.

• Their deal with his employer was that after 90 days the company would buy the home for 80% of the home's market value if they wanted to sell it quickly. But the couple thought they could get more by selling it themselves, so they let it sit. And since the market was dropping, the amount they could get was always lower than they wanted (which made the 80% offer progressively lower too). Finally, after months on the market and no hope in sight for help, they sold it to the company at 80% of the then very low market price.

• In the meantime, they had decided to upgrade their lifestyle in the new place. They bought a foreclosed (good price) house that was not yet finished (needed drywall, carpet, etc.). It was 4,500 to 5,000 square feet on 10 acres. In addition to fixing it up inside, they also bought two horses, some motorcycles, and some quads. They husband had told me that they had "stretched financially" to afford the house, so I have no idea how they afforded all the extras -- especially with what was happening to the price of their house here.

• Then, the bottom fell out. The company wasn't doing well and this July they let the husband go. He got some severance (I believe) but not much. Ugh.

So here's the summary of a real-life financial meltdown for this family:

• Move your entire family across country, leaving their friends, for a job move.

• Take a bath on selling your house.

• Stretch financially to buy a huge house on lots of land.

• Put a ton into the new home to fix it up.

• Buy lots of extras for fun too.

• Lose your source of income.

It's brutal all the way around.

The job move decision was probably a decent one -- they may not have had any other choices. But to upgrade their lifestyle in a rough economy seems unwise. The problems with their house are probably due to poor timing and lack of a realistic market view. In the end, if they had simply moved and kept their lifestyle the same, they would be in better shape, but still in a world of hurt. 

I'm not sure what they're going to do now (we lost regular contact with them once they moved), but I know they are looking at several options (we saw them briefly on a trip back this summer). It's just one example of what people are going through in this economy and it's very, very tough.

Comments

[Eugene Krabs]

I think one of the main lessons to draw from that (if we haven't already) is that there is no such thing as job security. At least, when it comes to planning our personal finances, we shouldn't assume that our jobs are secure.

I think that's probably the reason why they did what they did, because if the job is as secure, then... they could manage to "afford it".

[Lulu]

I am wondering why they would choose to upgrade their lifestyle just based on the fact the company was closing one office. If my employer closed one office and I had to move I would stay the same or downgrade. Closing one office means things are not going well...opening a new office might have lead him to believe that he could upgrade. Sad situation...but then a lot of poor decisions were made as well.

[MC]

I wonder if the "upgraded lifestyle" was necessary for your friend to get his wife/family to agree to the move. It's also possible that his salary after the move was promised to be higher.

It's a bit hard to judge when you most likely don't know all the details of the situation and when you also have the benefit of hindsight.

However, their intransigence on pricing their house seems like a legitimate thing to criticize.

[Apex]

"It's brutal all the way around."

Well put FMF.

The brutal circumstances exposed the brutal choices.

I wish it were the case that we could point to this example and say this is the rare case of someone making poor financial choices. Unfortunately most people make similarily poor financial choices. But you never see most of it because even with 10% unemployment, 90% still have their jobs and thus their poor choices continue to be masked.

I also wish it was the case that having to convince a family to make a necessary move or some other reason justified making poor financial choices to "buy them off". But it doesn't. There is no excuse for having had to relocate due to job instability, and as a result now owning two houses one of which is not selling and the price continuing to fall and in response you buy a bigger house than ever that needs a lot of work that you admit is a financial stretch and then pile on lots of expensive toys. There is no possible real world situation that could ever justify that. The whole thing is just a childish lack of discipline, prudence, common sense, and acceptance of reality. Children are allowed to live in these kinds of fantasy worlds. Adults are not supposed to but unfortunately way too many do.

"It's not until the tide goes out that you discover who is swimming naked." - Warren Buffet.

Here is a tip Warren: hold on to your swim trunks, because most of the people in the pool aren't wearing any.

[MasterPlan]

I feel like in the current environment there is a much slimmer margin of error. Apex is right, stuff that was masked before, is laid bare.

In my mind, I am convinced that "upgrading" is a trap (frequently).

I also agree with Eugene Krabs that the concept of a permanent job is an illusion. Honestly, we are all employees "at will". We are all contractors/consultants. This is something that I've grown to understand this environment when I am a contract employee in a top organization.