Options to foreclosure on rental properties?

[RedlineRex]

Hi all, looking for some good advice on what my options are when trying to dump some depreciating rental properties. I have received all kinds of differing advice. I'll try to sum up the situation quickly.

Have two rental properties (in the Sacramento area) that are on a pick-a-pay loan w/ NegAm option which the monthly payments will balloon up in the next year or so. We are already at negative cashflow so this balloon payment will destroy us. Each rental is already tens of thousands of dollars in the hole. We also have our primary residence which is on a safer fixed loan option so we are pretty safe there.

Being that these are rentals, it appears like things may get a little complicated. One word of advice I rec'd was to create an LLC and move these properties to the LLC. Supposedly this will protect me "personally" as much as possible. Is this a worthwhile option? Does anybody have any other suggestions or can refer me to a good real estate attorney in the Sacramento area for a consulation? Any advice would be appreciated before I seek financial advise randomly from the yellow pages.:frown:

Paul

 

[steveny]

an LLC will not protect you from collection of bad debt on a loan that was secured by your personal signature.


I am not trying to be a smart ass I just really want to know so I understand the way others think.

Why would you buy something that doesn't cash flow?

 

[Ryanmcd2]

an LLC will not protect you from collection of bad debt on a loan that was secured by your personal signature.


I am not trying to be a smart ass I just really want to know so I understand the way others think.

Why would you buy something that doesn't cash flow?

X1000, if you are not getting cash flow off something why do it? Did you ever make any cash off it and things changed or was it always this way?

 

[eclipse1501]

Hi all, looking for some good advice on what my options are when trying to dump some depreciating rental properties. I have received all kinds of differing advice. I'll try to sum up the situation quickly.

Have two rental properties (in the Sacramento area) that are on a pick-a-pay loan w/ NegAm option which the monthly payments will balloon up in the next year or so. We are already at negative cashflow so this balloon payment will destroy us. Each rental is already tens of thousands of dollars in the hole. We also have our primary residence which is on a safer fixed loan option so we are pretty safe there.

Being that these are rentals, it appears like things may get a little complicated. One word of advice I rec'd was to create an LLC and move these properties to the LLC. Supposedly this will protect me "personally" as much as possible. Is this a worthwhile option? Does anybody have any other suggestions or can refer me to a good real estate attorney in the Sacramento area for a consulation? Any advice would be appreciated before I seek financial advise randomly from the yellow pages.:frown:

Paul

Ive been in similar circumstances a few times in the UK and later in Spain with additional rental investement homes and from experience I wish I had ridden out the storm each time instead of selling. If you've got kids especially bite the bullet and you will find a way of hanging on in there. Whatever happens good luck!

 

[Ko-nsx]

Hi all, looking for some good advice on what my options are when trying to dump some depreciating rental properties. I have received all kinds of differing advice. I'll try to sum up the situation quickly.

Have two rental properties (in the Sacramento area) that are on a pick-a-pay loan w/ NegAm option which the monthly payments will balloon up in the next year or so. We are already at negative cashflow so this balloon payment will destroy us. Each rental is already tens of thousands of dollars in the hole. We also have our primary residence which is on a safer fixed loan option so we are pretty safe there.

Being that these are rentals, it appears like things may get a little complicated. One word of advice I rec'd was to create an LLC and move these properties to the LLC. Supposedly this will protect me "personally" as much as possible. Is this a worthwhile option? Does anybody have any other suggestions or can refer me to a good real estate attorney in the Sacramento area for a consulation? Any advice would be appreciated before I seek financial advise randomly from the yellow pages.:frown:

Paul

I'm with Steveny, don't believe the LLc BS. How long have you had them? Are you sure you can't even them rented, to stop the bleeding a little?

 

[peiserg]

ahh. gotta love the rentals.

I've got one (in an llc). This frikking troll finally gets evicted by a judge, and is going to sue me because she hurt her toe on a box of tile i had sitting in the garage. Gotta love the USA. She basically lives rent free for 6 weeks, then sues me!

one question i have.. and I'm not one to cheap out on lawyers, so i'm going to ask my lawyer in a day or so..

if I fold my LLC and open up another one, would that shield me from her lawsuit? I know builders do that all the time to shield themselves from people that find defects a couple years after a home is built..

 

[Ski_Banker]

a

I am not trying to be a smart ass I just really want to know so I understand the way others think.

Why would you buy something that doesn't cash flow?

Steve - you're kidding, right? Don't kick the guy while he's down.

 

[NSX GT]

If I were in this situation, I would just go into foreclosure, especially if I wasn't getting positive cash flow. Its only going to get worst and prices will be dropping an additional 10-20+ percent in most parts of Sac area. Assuming that the rental was purchased in the past 6 years (top prices) or less.

Some banks will work something out with owners entering foreclosure, but you have to be in default 3 months plus. Also it needs to be owner occupied. won't hurt to make a call.

Thanks to those "jump on the band wagon" sub-prime loan agents. Many of who are also in bankruptcy.

 

[steveny]

if I fold my LLC and open up another one, would that shield me from her lawsuit?

Yes, pretty much what LLC are used for. It's a good idea to keep only a few properties in each LLC.

 

[steveny]

Steve - you're kidding, right? Don't kick the guy while he's down.

No I am not kidding. I want to know the thinking that goes into buying something that doesn't cash flow. Maybe I am missing something and he may be able to teach me something.

 

[steveny]

Some banks will work something out with owners entering foreclosure, but you have to be in default 3 months plus. Also it needs to be owner occupied. won't hurt to make a call.

Typical good ol' idiots. It's the way the whole country is set up. We only help those who have already ruined their credit. We will only give something good to those who have done bad. If one person can go in an negotiate 30% off his loan then EVERYONE should be able to do so regardless of circumstances. When will we see people rewarded for doing good things.

NYS is talking now about putting a circuit breaker on property taxes. If you make more than a certain amount you won't save any money on your taxes, kind of like the stimulus package that was reduced over 75k. What is the friggen since in working if you get a slap in the face for it?

Anyways Rant off now. Good luck with whatever you decide.

 

[Dtrigg]

No I am not kidding. I want to know the thinking that goes into buying something that doesn't cash flow. Maybe I am missing something and he may be able to teach me something.

People will often use losses to offset gains. For example sell a stock at the end of the year, realize the loss for tax purposes and then repurchase at a wash sale 31 days later.

 

[RedlineRex]

steveny - originally the intent was for longterm gains since we could afford a little more out of pocket every month. unfortunately we lost the gamble in the long run. of course hindsight is 20-20 so it seems really obvious that it was not a good gamble today.

ko-nsx - we looked at upping the rent to offset but we would never find a tenant for that price. there are too many other rentals available in the for cheaper. One rental was my original primary residence purchased in 2000, this later turned rental in 2006. the other rental was purchased in 2003 strictly as an investment property.

I haven't missed a payment so everything is still good as of today. Just looking ahead as to what may be the best option(s). I figured on calling the lenders but wanted to see if I should/could do something else first.

 

[steveny]

People will often use losses to offset gains. For example sell a stock at the end of the year, realize the loss for tax purposes and then repurchase at a wash sale 31 days later.

That one I know. :biggrin:

 

[steveny]

steveny - originally the intent was for longterm gains since we could afford a little more out of pocket every month. unfortunately we lost the gamble in the long run. of course hindsight is 20-20 so it seems really obvious that it was not a good gamble today.

ko-nsx - we looked at upping the rent to offset but we would never find a tenant for that price. there are too many other rentals available in the for cheaper. One rental was my original primary residence purchased in 2000, this later turned rental in 2006. the other rental was purchased in 2003 strictly as an investment property.

I haven't missed a payment so everything is still good as of today. Just looking ahead as to what may be the best option(s). I figured on calling the lenders but wanted to see if I should/could do something else first.

Lease option it to the tenant.

Did you have some bad tenants that widened the gap of the loss.

 

[Ko-nsx]

steveny - originally the intent was for longterm gains since we could afford a little more out of pocket every month. unfortunately we lost the gamble in the long run. of course hindsight is 20-20 so it seems really obvious that it was not a good gamble today.

ko-nsx - we looked at upping the rent to offset but we would never find a tenant for that price. there are too many other rentals available in the for cheaper. One rental was my original primary residence purchased in 2000, this later turned rental in 2006. the other rental was purchased in 2003 strictly as an investment property.

I haven't missed a payment so everything is still good as of today. Just looking ahead as to what may be the best option(s). I figured on calling the lenders but wanted to see if I should/could do something else first.

Foreclosing would be a last option. Agressively advertise and see if you can at least just break even. Even if its at a slight loss it might be better to hold what you got for a while, the market will turn around. You'll be glad you did.

 

[NSXGMS]

Foreclosing would be a last option. Agressively advertise and see if you can at least just break even. Even if its at a slight loss it might be better to hold what you got for a while, the market will turn around. You'll be glad you did.

I doubt very much he'll be able to even come close to breaking even. He's way upside down and it's a buyer's market.

Holding on is not an option as his neg-am is going to reset in a big way and his payments are going to explode. And the market is far from turning around. Maybe in a year or two...

Quite simply, the OP's options are:

1) Stop making payments and let the properties foreclose. Yes, it will be a foreclosure and destroy credit but they probably won't come after you for the loss. Since it takes at least 6 months generally to finalize foreclosure from the time the first payment is missed the OP can collect the rents for awhile and not make any payments, milking it for whatever he can.

2) Sell the properties as a short sale or short payoff. The lender will agree to forgive the difference between the actual sale price and the principal balance of the mtg. This is great except that the owner will receive a 1099 for the difference which will be considered income and could have serious tax ramifications. Credit will be spared if the lender agrees to the short sale without the owner being late.

3) Try to negotiate what's called a "deed in lieu of foreclosure". This is essentially turning over the property back to the lender immediately, no questions asked, in exchange for debt forgiveness. Many lenders will do this as they know the owner cannot make the payments and they'd rather get the property back now as opposed to dealing with a non-performing loan and not being able to do anything about it for at least 6 months while foreclosure progresses. This lets the bank liquidate it as soon as possible. In a declining real estate market the banks are really happy to do this as the more time that passes the lower the price they will be able to get. Liquidating it sooner than later is better for them.

4) The OP might be able to discuss either extending the time before the loan payments increase or negotiate a reduction in the principal balance and retain the property. I'd call the lender and see if they are willing to entertain these options.

 

[RedlineRex]

Thanks all, it looks like I now have an idea what my options are from here.

NSXGMS, thanks for the breakdown. I wasn't aware of your options #3 and #4. I'll contact the lenders and see how far they are willing to go to help me out. Being that my neg-am is not set to reset for the next 18mos, maybe they will be more willing to negotiate while I'm still able to make the monthly payments.

 

[sahtt]

Those 4 options are more or less complete besides the perhaps more obvious one of selling the properties at a loss and just getting rid of them. Obviously this is only an option if you have enough capital to pay the bank off.

I can't tell you how many people I know that have moved and been stubborn on getting a 'good' price on their previous primary residence. This can be costly and couterproductive.

i.e., a friend I know has a home he is asking 275k for with a 3k/month mortage. The previous year and a half ago, his neighbor's home sold for just under 300k, very similar sqft, almost identical original builder's asking prices 10 years before, etc. except his neighbor added a decently sized pool/deck.

My friend listed his at 285k about 14-16 months ago, and every six months he has reduced the price 5k or so. He had an offer of 260k that probably could have been negotiated towards 270k as soon as he put it for sale. Now he's asking 275k and the best legit offer he has is in the 240's. I told him in the very beginning if he keeps this up he's going to sell right at the bottom, he's well on his way. Even dumber is the fact he's paid nearly 50k in mort payments during this time, much of which basically goes down the drain.

Based on what you've told us, walking away may end up being the most rationale decision if the property values continue to decline and the rate increase looms closer. Personally I'd take a substantial hit and be done with it before that happens. I also would have got rid of it the instant I projected negative cash flow on a depreciating asset, ouch.

 

[NSXGMS]

Those 4 options are more or less complete besides the perhaps more obvious one of selling the properties at a loss and just getting rid of them. Obviously this is only an option if you have enough capital to pay the bank off.

I can't tell you how many people I know that have moved and been stubborn on getting a 'good' price on their previous primary residence. This can be costly and couterproductive.

i.e., a friend I know has a home he is asking 275k for with a 3.5k/month mortage. The previous year and a half ago, his neighbor's home sold for just under 300k, very similar sqft, almost identical original builder's asking prices 10 years before, etc. except his neighbor added a decently sized pool/deck.

My friend listed his at 285k about 14-16 months ago, and every six months he has reduced the price 5k or so. He had an offer of 260k that probably could have been negotiated towards 270k as soon as he put it for sale. Now he's asking 275k and the best legit offer he has is in the 240's. I told him in the very beginning if he keeps this up he's going to sell right at the bottom, he's well on his way.

Based on what you've told us, walking away may end up being the most rationale decision if the property values continue to decline and the rate increase looms closer. Personally I'd take a substantial hit and be done with it before that happens. I also would have got rid of it the instant I projected negative cash flow on a depreciating asset, ouch.

Good post.

I don't think it's necessary, however, to actually have to come up with the balance to pay the loan(s) off. That's a major league hit to the wallet. If you're just going to unload them I'd just do a short payoff. A 1099 for $x is much better than actually coming in with the money to pay it off. And there's no reflection of a short sale on one's credit unless you've been late on the mtg.

 

[steveny]

Those 4 options are more or less complete besides the perhaps more obvious one of selling the properties at a loss and just getting rid of them. Obviously this is only an option if you have enough capital to pay the bank off.

I can't tell you how many people I know that have moved and been stubborn on getting a 'good' price on their previous primary residence. This can be costly and couterproductive.

i.e., a friend I know has a home he is asking 275k for with a 3k/month mortage. The previous year and a half ago, his neighbor's home sold for just under 300k, very similar sqft, almost identical original builder's asking prices 10 years before, etc. except his neighbor added a decently sized pool/deck.

My friend listed his at 285k about 14-16 months ago, and every six months he has reduced the price 5k or so. He had an offer of 260k that probably could have been negotiated towards 270k as soon as he put it for sale. Now he's asking 275k and the best legit offer he has is in the 240's. I told him in the very beginning if he keeps this up he's going to sell right at the bottom, he's well on his way. Even dumber is the fact he's paid nearly 50k in mort payments during this time, much of which basically goes down the drain.

Based on what you've told us, walking away may end up being the most rationale decision if the property values continue to decline and the rate increase looms closer. Personally I'd take a substantial hit and be done with it before that happens. I also would have got rid of it the instant I projected negative cash flow on a depreciating asset, ouch.

There is defiantly something I have noticed with real estate, the first offer you get is usually the best offer you will get.

 

[pvmike]

I doubt very much he'll be able to even come close to breaking even. He's way upside down and it's a buyer's market.

Holding on is not an option as his neg-am is going to reset in a big way and his payments are going to explode. And the market is far from turning around. Maybe in a year or two...

Quite simply, the OP's options are:

1) Stop making payments and let the properties foreclose. Yes, it will be a foreclosure and destroy credit but they probably won't come after you for the loss. Since it takes at least 6 months generally to finalize foreclosure from the time the first payment is missed the OP can collect the rents for awhile and not make any payments, milking it for whatever he can.

2) Sell the properties as a short sale or short payoff. The lender will agree to forgive the difference between the actual sale price and the principal balance of the mtg. This is great except that the owner will receive a 1099 for the difference which will be considered income and could have serious tax ramifications. Credit will be spared if the lender agrees to the short sale without the owner being late.

3) Try to negotiate what's called a "deed in lieu of foreclosure". This is essentially turning over the property back to the lender immediately, no questions asked, in exchange for debt forgiveness. Many lenders will do this as they know the owner cannot make the payments and they'd rather get the property back now as opposed to dealing with a non-performing loan and not being able to do anything about it for at least 6 months while foreclosure progresses. This lets the bank liquidate it as soon as possible. In a declining real estate market the banks are really happy to do this as the more time that passes the lower the price they will be able to get. Liquidating it sooner than later is better for them.

4) The OP might be able to discuss either extending the time before the loan payments increase or negotiate a reduction in the principal balance and retain the property. I'd call the lender and see if they are willing to entertain these options.

Good post. A couple notes:

2) The loss experienced by the lender in a short sale is 1099'd to the borrower as a gain. Owner occupied property is exempt from this tax, while income property is not.

4) The lender cannot reduce the principal amount. The lender can change the rate to a lower fixed rate, add delinquent amount to principal, or suspend payments/late payments for a short period of time.

Both a deed in lieu and a short sale will require the borrower to prove to the lender that foreclosure is the only other alternative. The lender will require personal income and expense documentation to verify. If you plan on going this route, get on the ball. It'll take a month to even get a loss mitigation representative assigned to your case.

 

[DocL]

There is defiantly something I have noticed with real estate, the first offer you get is usually the best offer you will get.

Isn't that the truth. I sold my townhouse in April and since then other units in my old development are now selling for $30k-$50k less than I got. I'm now getting ready to move into the home that I'm building and the values of two year old homes have fallen tremendously in my new community. I'm going to try and renegotiate the contract price or get the builder to throw in a pool.

 

[Daedalus]

1) Stop making payments and let the properties foreclose. Yes, it will be a foreclosure and destroy credit but they probably won't come after you for the loss. Since it takes at least 6 months generally to finalize foreclosure from the time the first payment is missed the OP can collect the rents for awhile and not make any payments, milking it for whatever he can.

Collecting rents without making payments is called rent skimming and is illegal. In a lot of foreclosures the banks don't go after the borrower because they can't. Primary mortgages are non-recourse. Since these are rentals, that may not be the case.

 

[steveny]

Collecting rents without making payments is called rent skimming and is illegal. In a lot of foreclosures the banks don't go after the borrower because they can't. Primary mortgages are non-recourse. Since these are rentals, that may not be the case.

100% correct. We are set up with a few banks, our management company and attorney step in and seize control of rent collection when this happens. I have had it out with a few owners who thought they could collect rents and skip the payments. It's against the law to do so. It's stealing.