Creative Refinancing When You're Underwater

Buy a house and you're investing, whether you think along those lines or not.

For many, buying a house during a boom time turned out to be a poor investment. The value on the asset has declined, but the mortgage never keeps pace with those fluctuations.

Michael Farrelly took out a mortgage on his house so that he could buy a building site. Property was booming in Ireland and why not take advantage of a situation? The place was worth 300,000 euro. His son wanted to build a house near the father and the family farm.

The economy took a dive and interest rates edged up, until Mr. Farrelly could no longer meet the required payments for the house in County Westmeath.


Like everyone else facing the same problem, Mr. Farrelly tried to work out an accommodation with the sub-prime lender that turned the screws on him. The lender was not willing to settle for a single payment of 20,000 euro to settle the debt.

So the house went up for auction, a house without running water and no access to the road because Mr. Farrelly owned the land and why would he improve the place he couldn't keep by giving up some of his land for a path?

The house was clearly not worth 300,000 euro. It was essentially worthless, except to someone in the Farrelly family.

Mr. Farrelly's daughter went to the auction and bought the house for 76,000 euro.

Normally, a close family member would not be allowed to bid because it's seen as a way to undercut a lender. Buy something, let it go into foreclosure, and send a relative in to snap up the property at a fraction of the value, and the entire home mortgage industry would collapse through the loophole.

In this case, an isolated house that is only reachable by air could never be sold to anyone. GE Money had little choice but to accept what they could get, which was better than nothing.

They still intend to pursue the balance due with Mr. Farrelly, however.

In the meantime, the house has been kept in the family. The Farrelly clan is happy to put this nightmare behind them.

No one else bid on the property besides Mr. Farrelly's daughter, which was a clear indication to GE Money that it was her offer or nothing.

Keep that in mind if your home is going under the gavel and you can scare away any and all potential investors looking for bargains. Send in a distant cousin or find a rich uncle.

There's always a loophole if you look carefully enough.