Moses Kagan on Real Estate

How bad credit restricts opportunity

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A word of warning: This piece is going to sound patronizing or overly earnest, depending on what you think of me. Just know the sentiment is genuine. Here goes:

Whenever we negotiate a tenant relocation, where we pay the tenant an agreed amount in exchange for the tenant leaving the building, I make it my business to advise the tenant to do something good with the money he/she is receiving.

I usually say something like: “Is your credit ok? Because if it is, you ought to consider using this money as part of a downpayment on a property of your own. You can get a government (FHA) loan that lets you buy something with 3.5% down. This money could help you do that.”

Pause for a moment to appreciate the situation: Having a stranger show up offering a lot of money could be the kind of lucky break that puts a family on the road to the middle class. They could go out, find a small income property of their own in a rough but liveable neighborhood, and use the relocation assistance as (part of) the downpayment. That one move would give them an asset base from which to grow real, enduring wealth. It would make them into owners and allow them to get debt (in the form of a mortgage) working in their favor instead of against them.

Nearly 100% of the time, though, whether I’m talking to a 22 year old or a 72 year old, the answer that comes back from the tenant is something like: “You know, my credit is bad. I’m working on it.”

Having never been poor, I am not judging people in this situation. It must be INCREDIBLY hard it would be to live on $2k a month in Los Angeles, which I know for sure a lot of people do. I imagine that it’s incredibly tempting, when you’re in that life, to take the easy credit offered by stores to buy things you can’t afford. Then, when the bill comes due, you can’t pay and your credit gets dinged. It’s understandable, predictable, and disastrous, because the effect is to prevent you from taking real advantage of opportunity when it knocks.

I would love to get involved in helping to change this screwed-up cycle. Does anyone know of a program that works on this in LA?


Written by mjkagan

10/29/2012 at 6:46 am

Posted in Uncategorized

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