Once-promising real-estate investments led to bankruptcy for a couple with a young daughter. Now they're rebuilding their financial situation with the help of a financial planner.
Nearly four years ago, as Daniel Martinez Galan and his wife, Janice Blackmore, were pounding nails and driving screws into a pair of Skagit Valley fixer-uppers they hoped to rent out or sell, the economy started pounding and screwing their investment.
Despite her prior experience in commercial real estate and his skills as a carpenter and an all-around handyman, the unexpected plummet in home prices caught them both off-guard.
Janice was then bringing home about $50,000 a year as a middle-school counselor; Daniel was squeezing carpentry jobs in between taking college classes with a student loan — and still hammering away at the couple’s investment houses.
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Together, they were saving a bit and paying off what little they put on their credit card each month.
“We weren’t living beyond our means,” says Janice. “Our credit score was perfect.”
Even so, their initial investment and Daniel’s sweat equity were evaporating before their eyes as the housing market started drying up in 2008.
By 2009, they found themselves losing $600 to $700 a month on the difference between the rental income and what they owed on the mortgages.
As the monthly mortgage payments drained their savings account, Daniel spent some dark days doubting whether the house improvements were worth his efforts.
Though frustrated, Janice says she was the one “unwilling to admit defeat. To me, it was all about my credit score, my credit score, my credit score.
“But no matter what we did, it was clear that things weren’t getting any better,” she says. “That’s when I started to feel like we needed to do something drastic.”
That’s why, in late 2011, after weighing the financial — and emotional — pros and cons of stopping payments on their investments in Mount Vernon, the couple reached out to a bankruptcy attorney for advice. Shortly after, they quit cutting checks to the bank.
According to July’s RealtyTrac Foreclosure “Heat Map,” they’re not alone in Washington state.
Though neither of their houses is officially in foreclosure yet, one in every 814 housing units statewide was in July, according to RealtyTrac, a national real-estate website featuring foreclosure, bank-owned and similar properties.
Skagit County was one of the state’s foreclosure hot spots: One in every 780 housing units was in foreclosure — but half the rate of neighboring Snohomish County, leading the state with one in every 388.
At first, Janice says, their bankruptcy decision “wasn’t easy.”
The last hurdle: “my ego,” she adds. “I was too caught up in my credit score.”
Since then, the couple have come to terms with their choice, Daniel says.
If stocks or other investments were sinking, Janice believes, investors would be more likely to drop them quickly.
Property owners, she adds, tend to view real estate differently.
“A lot of people used to look at houses as a very long-term investment because they planned to live in them forever and ever,” Janice says.
The Blackmore/Galan’s houses, on the other hand, were only ever intended to be short-term investments.
“What we realized,” she adds, “is that if something is pulling you down, you may need to cut the anchor.”
Though they initially struggled with pursuing bankruptcy, they now would like to “destigmatize” it for others like them.
“Bankruptcy is a tool meant to provide consumers relief. It doesn’t necessarily mean you’re an irresponsible or a bad person,” Janice says.
The move actually prompted them to closely examine their short- and long-term priorities.
For starters, Daniel is admitted to an industrial-design program at the University of Washington this fall.
That means the couple needs a new place to live — somewhere between Seattle and Janice’s job 62 miles away.
Second, the couple would like a bilingual Spanish/English education for their 4-year-old daughter, Luna, when she starts kindergarten — a preference that also affects where they will rent.
To give Luna some time to spend with Daniel’s family, they would also like to have enough money to occasionally travel to Mexico.
With that in mind, the couple was eager for a bounce-back plan — so they filled out an online survey to participate in a free financial makeover with a member of the Puget Sound Chapter of the Financial Planning Association.
After a first makeover, a couple of early recommendations emerged from chapter member Erin James Scannell, a certified financial planner with Bellevue-based Johnson, Scannell & Associates, a financial advisory practice of Ameriprise Financial Services.
Scannell recommended the couple rent a place to live in a North Seattle neighborhood so Daniel can bicycle or bus to school.
Even so, Scannell points out, “transportation is going to be a big cost as Janice commutes for just over an hour each way to and from Mount Vernon. They may have to mothball their second car to save the operating, maintenance, and insurance costs.”
If the couple chooses a place near McDonald Elementary in the University District, Luna could be eligible for the Spanish language immersion program there, he adds.
Next up, according to Scannell: “Write a budget. Janice’s take-home pay is about $3,600 per month. That’s the hard ceiling for their spending. Out of that amount they need to cover housing, child care, transportation, utilities, food, clothing, entertainment, and all of the usual incidental expenses.
“Budgeting is a balancing act,” Scannell continues. “The family can spend extra on their priorities, but they will then have to accept compromises in other expenses. They can spend a month in Mexico, but they will have to reduce their entertainment budget to almost nothing. They can live in Seattle, but they will need to find ways to save on food and clothing.
“Their family budget won’t look like other families’ budgets, but it doesn’t have to,” he continues.
“It should instead reflect their unique priorities and constraints.”
Rebuilding cash reserve
Part of that budget needs to create a new cash reserve since the couple’s savings were wiped out by bankruptcy, Scannell advises.
“While it would be nice to save for Luna’s education or for their own retirement, Janice and Daniel need to rebuild their cash reserve before they can commit any funds to long-term needs,” says Scannell. After that, “they can look at other aspects of their financial security including insurance needs, then working towards long-term needs.”
Scannell recommends getting a “jump-start on building the cash reserve by using the rental income from the houses in Mount Vernon. This income will suddenly disappear when the banks seize their foreclosed houses, which could happen at any time … While they are still collecting the rental income they should dedicate all of it to building up at least six months of expenses in ready cash.”
The couple should also start rebuilding their credit, says Scannell.
“The bankruptcy was a direct result of the real-estate boom and bust and not a reflection on their general attitude towards debt,” he says. “There are some well-established steps they can take to demonstrate their ability and willingness to make payments so they can once again secure the sort of credit that people ordinarily need at reasonable rates.”
And as parents, he says, Janice and Daniel need a will “if only to appoint a guardian for Luna in case something happens to both of them.”
The couple began acting on the suggestions immediately.
They found a small one-bedroom apartment within bicycling distance of the UW for Daniel’s coming school year.
To further save on transportation and child-care expenses, Janice and Luna plan to stay with her parents in Skagit County for a few days each week.
Next year, Janice says, they will “focus on Luna’s education by paying much higher rent to be in neighborhoods that correspond to Seattle Public School’s Spanish immersion programs.”
Meanwhile, she will look for work closer to Seattle.
As the family moves forward with their early steps, Scannell says his team is ready to help “Janice and Daniel to quantify how their choices in one budget category create constraints in other budget categories. We can help them to make more deliberate choices, but the choices must be their own. They are bright, capable people who know what they want and are willing to make the necessary sacrifices to get it.”