Sedona Stories 2: We Bought the House.

Sedona Stories 1 tells the story of our house hunt in Sedona and the purchase offer itself. We won the offer auction at $1.06 M thanks to the blind auction offer, which worked exactly as planned.

This installment tells the story of closing escrow after we won the offer auction. The purchase was much earlier than we planned. Our travel schedule was booked up through the balance of 2023, so we would not even have time to stay in the house until 2024. We had planned to buy a Sedona house in 2024, but this house and the price were just too good to pass up. One moral to this house search might be: Careful what you choose to look for. You may find it.

Getting the loan proved immensely more difficult than we anticipated. We had bought a house in Portland, Oregon just two months earlier than we made the offer on the house in Sedona. Our daughter lives in Portland and we visit occasionally. The process was so easy and simple that the lender actually waived the appraisal requirement. This time was different–not so fast and not so easy, for a number of reasons:

• Jumbo loan – this loan amount was in jumbo country, 65% larger than the loan for the Portland house.
• Business purpose – we purchased the Portland house as a primary residence, while the Sedona house had a business purpose. Extra verification required.
• Bank runs and shutdowns – The Federal Banking Authority had just forced Silicon Valley Bank into bankruptcy on March 10. We opened escrow on April 17, just after all banks and non-bank lenders had tightened up loan approvals extremely, based on guidance from FDIC bank examiners after SIVB bankruptcy.
• Confusion over residence address – While the Portland house had mistakenly been listed as our primary address, we actually live in Texas.
• Option trading – I trade options as a hobby, which is pretty lucrative. It complicates our financial statements from the brokerage company and our income tax return. More confusion for the loan audit team at the lender.
• Error in our 2022 tax return – You can imagine the problems when the loan auditors found an actual mistake in our 2022 tax return.
• Out of the country – We were traveling in Peru when escrow actually closed. Maybe not the best plan.

The purchase of the house in Portland on March 8 caused many complications to our subsequent purchase of the house in Sedona on May 19, only two months later. If the blame goes anywhere, it falls on us for not waiting until 2024, as we had planned.

The Portland house purchase chewed up some of our cash, thus changing our cash profile. The lender disallowed the rental income from our daughter, thus reducing our income ratios. The down payment for the Sedona house was lower and the loan was a higher percentage of the house value. Also, the loan approval auditors wondered why we bought two houses in two months.

The Portland house was listed temporarily as our primary residence, which cause no end of confusion, extra cost and explanations. The Sedona house was insured as a business because we expect to rent it out via short term rentals (STRs) for several years due to our travel schedule. Also, the Fed had raised interest rates, thus driving up the loan interest rate and the income qualification levels. A perfect storm indeed for our little dream house in Sedona.

Our residence in Cat Spring caused some confusion. Because we travel so much we did not want to rent a big place anywhere. Ben Mayberry, my friend from high school, had a perfect place for us, a barndominium still under construction at the time, across the street from his house in Cat Spring, TX. We got it furnished, parked my 1964 Rambler Marlin, an odd classic car, in the barn, and we stay there in between travels. The lender did not like the arrangement, even though our Texas drivers licenses verified our address in Cat Spring, as did the IRS and our bank.

The lender wanted a letter from Ben verifying our lease there. Apparently the signed rental agreement was not quite enough since Ben is a private individual, not a big residential rental company or property manager.

For 15 years we had filed extensions, because both our tax folks and we liked the extra time (to October 15) to gather docs and do the actual return. In 2022 our tax return was very simple, with no real estate owned. I got excited about filing on April 15 and the tax team did so. Big mistake.

If I had filed an extension then the loan approval team would not have had a 2022 tax return to review. Instead, they found an actual error in our tax return. The tax return did not include income from a pension we had received and reported for the past five years. We had sent the 1099 form for the pension to our tax folks, but the income was accidentally left out, which looked very bad.

The lender had to disallow the income since it was not reported and the question of tax fraud hovered over our loan application like a black cloud. Fortunately our tax folks filed an amended return within 24 hours of finding the problem. Truly an amazing response from the tax team. Of course, we needed to send another $17,000 to the IRS for the additional tax on the additional income, but by this time that seemed almost incidental.

The 2022 tax return also showed income from three companies as reported on K-1s, but only one K-1 was filed. Where were the other two K-1s? Would we have to file yet another amended return, only two days later? I looked deep into the weeds of the K-1, and on page 5 in the fine print, it disclosed that the company also owned shares of the two other companies and we received income and expenses from those two on a pass-through basis. OK, but where were the pass-through K-1s?

The total dollar amount for the pass-through K-1s amounted to $17. Could the lender just ignore that trivial amount? Well, no. They explained that the problem was not the amount but the possible fraud on the tax return. Due to the increased scrutiny from FDIC compliance auditors the lender could not allow anything out of compliance, regardless of the amount.

So I reviewed the K-1 again. Maybe it had a link to the missing two K-1s. Aha, there it was, in a small table in 8 point font. This little table contained all the info for the missing two K-1s. In fact this little table was the actual K-1s with the exact pass-through amount for us.

A quick call to the tax folks confirmed this. They had used the amounts from the table and the IRS accepted it. Our tax return was correct. The whole thing was just a misunderstanding by the lender. Oh, well, never mind.

The number of documents required by the lender and submitted by us climbed past 100, like a climber scaling a mountain with the peak wreathed in clouds. Who knows how high the peak is? Who knows how many documents the lender might require, before finally simply giving up on the whole loan application as a sad misadventure gone far wrong?

During this process we gradually lost faith in the lender ever approving the loan. While our loan broker was working hard for us, she was not in control of the loan auditors. We felt trapped in the 1914 novel Perils of Pauline. Like Pauline, we were tied on the railroad tracks with the escrow closing date rolling ever closer, a steam locomotive ready to crush our little dream of a get-away place in Sedona with a spectacular view of red rocks.

Would the lender ride up to save us moments before the closing date arrived? Would the lender finally wave an approval letter to cut away the red tape and endless forms that bound us to the railroad tracks? Or would we have to use our own cash to cut ourselves away from the rails?

If we paid cash we would need to reschedule the closing date yet again and the seller might not have a sense of humor about another delay. Our little escrow deposit cowered in the corner of the title agency, looking quite frightened and vulnerable.

Around this time our real estate agent, whom we have never met in person, sent us an email announcing his departure for an entire month, due to a family situation. Not his fault, but certainly our misfortune.

Initially we scheduled escrow to close about two days before we left on a trip to Peru. Probably not our brightest idea. With all the delays in loan approval we had to reschedule escrow. Taking a deep breath we delayed it for only one week, fearing that the sellers might not tolerate a longer delay. This put the close date directly in the middle of our Peru trip. You might chuckle at our unwarranted optimism in the face of demonstrated delays.

We asked our daughter to sign closing papers for us in our absence. We would give her designated power-of-attorney (DPOA) to sign for us for this specific transaction if the lender and the title company would accept her DPOA and signature. Getting their approvals proved challenging. The title company would use only their own form, which required a notary and a witness. The lender would not accept any alternate signature for ownership by a trust, so we had to take title as plain old community property instead of inside our trust.

Our time was up. OUr flight was scheduled for Tuesday and here it was, Monday morning with the DPOA document not even accepted yet, much less printed and notarized. The notary showed up late and wanted to leave early, as she had a long drive to her next appointment. The title company finally sent the doc they would accept, in pdf. It had our middle initials.

Next we needed the lender’s approval for the DPOA doc. After much dialing and gnashing of teeth the lender finally reviewed the DPOA, then said they would not accept a doc with our middle initials, as the loan papers used only first and last names.

The DPOA doc from the title company was a pdf, with some security. The notary and I spent too long cracking the pdf. Finally, we cracked it, removed the offending middle initials and prepared to sign.

“What is this witness signature?” I asked.

The title company confirmed that the DPOA doc needs a witness. We often stay in a private residence in a gated community with only a few houses, all on large lots and we don’t know any neighbors. There are no retail locations nearby either. Where could we find a witness?

Then, the doorbell rang. By a bizarre stroke of luck, we had previously scheduled AAA to fix our car as the battery had died while we were on a previous trip. We had to fix it since it was parked in the EV charging spot. Could the AAA guy witness the doc? The notary agreed, so long as he had a picture ID. Would he witness the doc? Sure, he said, so long as it would be quick. Wow, what a lucky break. Maybe the only one in this whole perilous saga.

We finally signed and notarized the DPOA and sent pictures of the signed docs to the lender and title company. Our AAA guy drove away and the notary drove away. Whew, time to finish packing.

Then telephone rang. Uh, oh, it was the title company. We had forgotten to check the box giving our daughter the power to do the transaction! The DPOA was signed, witnessed, and notarized, but useless. We had to check the box, then get the notary and the witness to sign one more time, verifying that we had signed and initialed.

We made frantic calls to the notary and the AAA guy. Could they come back quickly to sign, initial and notarize once more? Yes? Yay!

Finally, with the box initialed, witnessed, and notarized, both the lender and the title company accepted the DPOA. We packed, dropped by Fedex to send the hard copy DPOA to title company, and drove to the the hotel for the departure to Peru on the next day.

Whew, the tension and anxiety melted away. The house purchase process was ready to go and we shifted our focus to the trip to Lima, Cuzco, and Macchu Picchu. Or so I thought.

On Tuesday I got a text from the lender, with a few more questions, forms, and signatures needed. We were in Aguas Calientes, Peru, about 9,000 ft. elevation, with spotty internet connection. My anxiety climbed well over 9,000 ft. After many tries, I downloaded the new docs, printed them at the front desk, signed, took pictures of the executed docs, and emailed the new docs back to the lender, from my phone. The tension dropped, with some help from a local beverage.

Thursday afternoon, with closing scheduled for Friday, there was no word from the lender yet. Was the loan approved, was there yet one more piece of paper needed, with yet more signatures?

Finally, late Friday, we got the news that the lender had wired money to the title company and the deed had recorded in our name. We achieved our goal of owning a house with a view in Sedona.

Our new house in Sedona was empty, with no furniture, no services, and no chance for us to occupy it until 2024. How could we get it finished, furnished, and prepped for short term rental? How could we do all the advertising for short term renters, then clean up and prep between rentals? And there was always the additional paperwork. How could we file the business licenses, get the approvals and permits from Arizona and Sedona for STRs?

The previous episode, Sedona Stories 1, describes our adventures in buying this dream house. Sedona Stories 3, coming soon, recounts the adventure of preparing the dream house for short term rental.