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The Worst Investment Decision A Homeowner Can Make

By Donna S. Robinson | March 5, 2012

It's more common that you might think. I've personally consulted with numerous people who've made what I term the worst investment decision that most people ever make.

Big mistake - watch out! © Kirill Zdorov -

It's funny how this mistake seems to afflict those among us who are the best educated of investors and entrepreneurs. It does not seem to matter what age you are, or what social strata you come from. In fact, this is not a problem that afflicts the poor or those who are less educated about financial matters. People who are "credit challenged" rarely make this mistake. Instead, this mistake seems to be the very one that is most likely to be made by people with "perfect credit" who have "never missed a payment in their life".

The mistake I'm referring to is using your personal residence as collateral for a business loan. While I'm sure there have been plenty of folks who've successfully used the collateral in their home for a business venture, it's  difficult to consider the real risk that is involved in doing this, when it's early in the game and everything looks rosy.

One case that I dealt with was that of a homeowner who had a thriving business for over 20 years. He had owned his personal home, located in an upscale section of Atlanta, Georgia, for some 26 years. With only 4 more years left on his 30 year mortgage, it was practically paid for.

But somewhere along the way, his thriving business began to develop problems. As time went on, he found that he needed additional capital to keep the business in operation. Since he was struggling with his own personal income, he found it impossible to get a traditional business loan without some significant collateral. The housing market was going full guns at the time, (1999), and the house had appreciated quite a bit in value. So he pledged his home equity as collateral, took out a second mortgage, and invested the funds in his floundering business. He thought sure that he could turn things around if he just had some additional capital to work with. Instead, he ended up losing both the business and his personal home.

By the time I spoke with him, the conversation was not about saving the home, it was about what would happen with the foreclosure. In the vast majority of foreclosures, a second mortgage holder may recover a very small amount of their principal, or get wiped out entirely. In this case, the first mortgage payoff was so low, the second mortgage holder actually bought the home at the foreclosure auction, and was able to recover all of their principal by reselling the home to someone else. The previous owner went to live in an apartment nearby.

Another time I was contacted by a real estate investor who was a very bright, college educated guy, employed by a major fortune 500 company. He was in a disagreement with his wife about what to do with some investment properties that he had purchased, that were losing money. He wanted to take out a second mortgage on his personal residence, to keep the mortgage payments current on the three investment properties.

The properties, all single family rentals, were located in a smaller town, about 70 miles from where the investor lived. His wife was very concerned about taking out a second mortgage on their personal home, to keep paying on the rental houses. She suggested that they contact me to "arbitrate" their case and advise them on what to do.

When I spoke with the investor, I found that his reasoning was that he had "perfect credit" and did not want to miss a mortgage payment on the three rental properties. But the problem was that all 3 of these properties were vacant, so he was carrying 4 mortgages already, counting his personal home. He did not want to damage his credit, so he had been borrowing money on credit cards, and now was considering taking the equity out of his own home to keep those mortgage payments current.

Surprisingly, the investor had never seen the 3 rental properties himself. He did not inspect them before the purchase, and had no real idea why they had been vacant since he had bought them over a year earlier. He was busy working, and "did not have time to deal with those details himself".

He had bought the properties through a real estate agent in the town where the properties were located. The agent was offering a "turn key" solution for real estate investors who had good credit and money to invest, but did not have time to manage the properties themselves.

I was trying to determine why these three properties were all vacant. After reviewing the property appraisals, and checking further, I discovered that the properties were actually shacks that were about to fall down, and were not even livable. The appraisals had been falsified, and the investor owed about $300,000 for properties that were worth a total of maybe $50,000.

The whole scheme turned out to be one of the biggest real estate investing scams ever perpetrated in the state of Georgia. Eventually the real estate agent, the phony seller, and the closing attorney all went to prison for fraud. But the bank who made the loans did not care. They still wanted their money. The hapless investor ended up with his credit destroyed. If he had taken out a second mortgage on his personal home to keep paying those rental property mortgages, he would have lost his personal home as well.

And finally, there's this recent story, of a former Director of Business Development at a high tech firm in Silicon Valley. Seeking a less stressful life, he took a buyout package from his Silicon Valley firm, and moved to Breckenridge, Colorado, where he and his wife built a gorgeous 2 million dollar dream home. Then they opened two restaurants in the upscale ski resort with, you guessed it, money borrowed against their dream home. After the melt-down in 2008 the restaurants went bankrupt, leaving them with a $7000 a month mortgage payment and no income. The house is in foreclosure. Since they also had invested their savings to build this home, they are left with virtually nothing.

In the wasteland that is the housing market collapse, we would all be better served to remember that having a personal home that is paid for represents much more than potential investment capital. It is security for our retirement years, peace of mind and an essential part of our lives that should never be risked without considering the dire nature of the potential consequences.
Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for Realty Biz News. She is an active real estate investor who also provides coaching and consulting services to individual investors, investment companies, real estate agents and brokers. Her book, "Fundamentals & Strategies For Buying & Selling Homes" is available on her new website at 


Donna S. Robinson has been involved in the real estate industry since 1996. A licensed agent and real estate investor, she is a recognized expert on residential real estate investing. Her course, "Fundamentals & Strategies For Real Estate Investing" is approved for CE credit by the GA Real Estate Commission. She has authored several books on real estate investing, and consults with residential investment companies. She also offers coaching services to real estate investors.

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