I am stuck with 2 rental properties that are costing me a lot of money. I am over leveraged, the homes are worth less than I owe on them, and my rental income is decreasing. My taxes have increased sharply and the housing glut has driven rents down in my area. I’ve asked my banks to modify the loans but they will not. A few not-for-profit organizations have declined to help because I do not live in these properties.
Both houses are financed with 80/20 loans that blend around 9%. What can I do to avoid get my payments lowered and avoid foreclosure? Should I try for a short sale or should I continue to burn through my savings and personal income until the market turns around??? TIA
If you have the income to pay the bills, then I would do so and hold the property until you can sell. If you don’t, then I would be very explicit in detailing your situation to the bank. If they still won’t do a loan modification, then I would see if they will do a “deed in lieu of foreclosure”, which means that you give the property to the bank and avoid the foreclosure.
Mike has given you some great advice. Now if you want to get a loan modification done you need to really paint the picture to the lender. are the 80/20 with the same lender?
We just had a client that had a first and second with Washington Mutual. We lowered 2nd from 145K and they took a 16K settlement… The client is keeping the home.
Another person took did a short loan modification. Lowered the balance, lowered the interest rate and only had to come up with about $450 to modify the loan.
What I am saying is that when you ask them to do something you need to give them a reason to do so. PROOF!
If homes have dropped in value you will need to show them. They will order either a BPO or an appraisal. If a short sale is in order then give them a reason to do so.
I have had people call lenders to do loan modifications only to be turned down. But they called back after building there own case and BAM they got approved. There is a site called loansafe DOT (.)ORG that is for consumers wanting to do there own loan modifications.
the lender won’t even speak to me until i start missing payments. I have excellent credit and I don’t want to ruin it. How can I get them to modify the loan without falling behind on my payments? One 80/20 is with GMAC and the other with BOA.
You already know that you are in a losing situation, just let it go, you cant do anything about it , your credit will be shot or you put money in a pit, i would let the bank take it.
That is TERRIBLE ADVICE and exactly what’s wrong with our country today. When a person signs a contract (mortgage) with the bank, they are giving their word that they will make the payments. If they can make the payments, even if they are losing money, they should do so. You’ll note that Mistapaants has excellent credit (financial trustworthiness) and he didn’t get that by blowing off his obligations.
You cant keep making payment on a devalue house, and if you keep making payment you dont know when it will come back, the best thing is let it go back to bank.
The current value of the house or when the market will come back has absolutely nothing to do with making the mortgage payment. It shows a tremendous lack of character to give the property back to the bank just because you are upside down on a house!!!
If he can make the payments, he should do so!
If he can’t make the payments, then he should try to work it out with the bank.
the lender won't even speak to me until i start missing payments. I have excellent credit and I don't want to ruin it. How can I get them to modify the loan without falling behind on my payments? One 80/20 is with GMAC and the other with BOA.
Mistapants,
That’s the problem of dealing with a big bank/finance company. It’s very difficult to have a relationship with these companies. The way you would get them to speak to you is to drive down to the bank and talk with the bank president or vice president. You can do that with a small, local bank. That would be nearly impossible with GMAC or BOA. However, difficult or not, I would keep trying. Jr’s suggestion about a hardship letter is a good one and I would send it certified mail.
Finally, this is a good lesson for every new investor. You MUST buy properties at a BIG discount and you MUST ensure that you will have positive cash flow (with real world expense numbers) if you want to succeed in this business! If you buy at a HUGE discount, you won’t be upside down even when the market tanks.
[quote author=propertymanager link=topic=39209.msg189083#msg189083
Finally, this is a good lesson for every new investor. You MUST buy properties at a BIG discount and you MUST ensure that you will have positive cash flow (with real world expense numbers) if you want to succeed in this business! If you buy at a HUGE discount, you won’t be upside down even when the market tanks.
Good Luck,
Mike
[/quote]
THIS THIS people is 100% the frackin truth. There is a saying investors always go by and that is you make money on the buy not the sell. Always ALWAYS buy discounts never by close to retail PERIOD.
The bank and the not for profits won’t help me AND 2 tenants announced they are moving out unexpectedly. I need to get rid of these houses. What should I do? Default and then go for a loan modification or deed in leau of foreclosure? Short sale? If I default for a few months what happens to my credit? How long will it take me to recover from this in terms of my credit? Can the bank come after my personal home (which I have no equity in)?
I’ve got some personal experience with being behind. Back during the dark days of my life (1st marriage), I let our house get 4 months behind. Well, technically it was just after the divorce. Normally I’m very responsible especially about bills, but I was just really tired of supporting the soon to be ex with her live in loser. She was court ordered to pay the mortgage and did so for awhile. Then she quit. I had been paying her so much for so long and I’d just had it. Both our names were on the mortgage. I ended up being about 2 weeks shy of foreclosure. My credit scrore dropped from around 730 or so to 580 because of this. I bumped my credit back up to 680 in just a few months by paying off all my credit cards. The situation above happened in fall 2005. I remarried and we just bought a nice home for our family for just over $200K. We also are closing on 4 SFHs this next week.
As for your specific situation, I don’t know how long it will take you to recover but maybe you can gauge things by how my situation went. My score is 750 now and neither of our current lenders even questioned me about the late payments.
All real estate goes up 5% to 7% per year. The problem is figuring out where the actual value is when you are buying. If you wait long enough what you owe on the house will reach the value and become positive. The problem is that you will run out of money before that. That is why cash flow is the ONLY thing that is important when you look at buying real estate. You may say you are going to sell the house so you don’t care about cash flow. But if you buy a house that cash flows then it will flip also, but a house that will flip may not cash flow. If you run into a problem and have to keep the house for a very decades and it cash flows it is not problem.
Realtors always try to sell you on appreciation and equity capture etc. Those things are free and the agent did no work to get that. It takes work to find a house that cash flow. The agent didn’t earn his commission until he shows me a house that cash flows.
Wow dang…horrible advice twice in the same thread. It’s easy for someone on the sidelines to tell someone to just not care about their credit and default. Under your advice, Mistapaants could expect to ruin excellent credit, ensure it will be nearly impossible to get a loan for anything in the forseeable future, cause any and all credit card rates to skyrocket to a default rate of probably around 23% or so, make insurance rates skyrocket, etc.
Mistapaants has excellent credit and doesn’t want to ruin it. There was nothing said in the thread about not being able to make payments. Rather, it was stated the balance owed was more than the current value of the properties. There are all kinds of repercussions to just throwing in the towel.
A bank isn’t going to short sale for you if you’re current on your payments. They’re not going to voluntarily lose money on the deal if you’re able to pay. So for that to be considered, you’d have to be behind which you can expect will trigger lots of the things I listed above.
Can you try to get new tenants in there to help lessen the financial pain? I would not voluntarily default if you care at all about your credit (which it seems you do).
I certainly don’t need advice from someone like you. From what I’ve seen so far, you give HORRIBLE advice and have yet to really contribute anything useful here.
So I’m “over loaded” with Real Estate, huh? So I guess anyone here who has aspirations of purchasing multiple properties for investment will be over loaded. Lets see you take on Propertymanager on this one.
Diversification - Hmmm… I have IRAs for my wife and myself, 529 plans for all my kids, a Thrift Savings Plan and a vested retirement through my job.
Oh, and what did my ex get from the divorce? I got custody of my kids. She owes me child support. She can’t touch a penny of my retirement EVER. I owe her nothing. I ended up with all the cars. She got the furniture we had that I didn’t want back. She was “given” the cheap house to pacify the judge so I could save my retirement. She ended up losing that house so she basically ended up with nothing and I got everything.
May I suggest you master the English language before you start throwing stones at others?
Justin you are over loaded with real estate if you close on 4 sfh, you need to diversified.
Everyone that I know that is truly successful got that way by being an expert in one field - NOT by being diversified in a bunch of things. Just look at the stock market. Financial planners have been screaming “DIVERSIFY” for years, with their intention being that you invest in a wide array of stocks. If you invested a bunch of money in a diversified stock porfolio 10 years ago, you are now in a losing position. Ten years - GONE! (and I wouldn’t bet that it’s coming back anytime soon)
It sounds to me like Justin is doing very well for himself!
Mistapants, You’re on the right track with making the pmts. You might want to try and make the rents a lot lower than your market rents. You might even want to try and put some inexpensive “incentive” items to get QUALITY tenants in. The lower rents will be better than nothing. This business is about reputation. Do what you can to preserve it. Paying your bills as promised is good ethical and business advice. Remember, for you to default is just like the scumbags who don’t their rent when things get tough. A customer who doesn’t pay is a thief! You sound like you want to the right thing. Forget what Dang44 is saying. He’s steering you down the wrong path. Somehow I think you know that and will do the right thing… Here’s the bottom line. You made a promise to pay. If that means getting a 2nd or 3rd job to do it, then do it. If you have kids, they’re watching how you handle this. They’ll learn from you… Good luck.
Mistapants,
You’ve got to rent those units! This is where you need to do some work!
Put an ad in the newspaper, Craig’s List, local Pennysaver and Dollar papers.
Put nice attractive “For Rent!” signs on the property. Put a Flyer box on the sign with an attractive info. sheet. Put your phone number out there.
Get over to that property evenings and week ends. Be there. If someone slows down, rush over and hand them a flyer. Cut the grass, rake, clean up trash, wash the windows, hang curtains or blinds, sweep the porch. Make it the sharpest looking exterior in that price range.
Make an incentive package. Offer a free month/week’s rent, a free TV (you’ve probably got an extra one somewhere now that you’re not watching it), a dog fence, something.
Be available at a moment’s notice to show the unit. Have it be bright, clean, and smelling good. Put a pot of flowers in there.
The point of all this is that you need to SELL tenants on renting from you. If it is not rented, YOU are not selling. Good tenants don’t always drop into your lap. You have to go out there and market. Otherwise the rental business is not for you. Remember, nice tenants rent nice places.
But first you have to find those tenants. Everytime you show the unit, ask those people on feedback: “Is there anything I can do to make this unit fit your needs better?”
dang is hilarious… i’m going to keep scrapping until the market turns around and i can refinance. I am young and I have a good job to get me through it. Someday these money pits will be worth money… I hope. Thanks for the advice non-crazy people.
Mistapants. I’m glad to see you can see through dang44’s hard to read posts and let common sense come through. I think if you concentrate on getting these units rented with GOOD tenants. Even if the rent is much lower than the market.
I do agree with the general sentiment here that it is your obligation and duty to make good on your debt as that is what you agreed to when you signed the mortgage contract.
However you should be aware that dang does have a point in one regard. These properties you have purchased will more than likely never actually turn a profit or even break even. This is because of several reasons:
You bought these properties at the higher end of a huge bubble (probably close to or at market price), are already underwater, and the bursting is far from over.
Even with 20% down you are already cash flow negative, and likely by a large amount since you are asking for help, with imminent and future much lower rents due to oversupply, a deep recession, and growing deflation.
There will be other costs associated with just owning the property such as taxes, maintenance, etc that you have to figure into your final numbers to see if you turn a profit at the end.
There is and will be lost opportunity costs associated with the cash already outlaid for the 20% down, the principle payments made, and the principle payments to come. Basically $1 today is worth more than a $1 tomorrow, unless of course deflation completely runs amok in which case you’ll be killed anyway by an even deeper fall in the property’s value and expected rents.
Property values normally only increase at the pace of inflation, without artificial external distortions of the market. Some will argue about this but some multi-century studies suppose this. Normally this would mean 3%-4% a year. If we enter a deflationary period (as it currently looks like we are) that trend will actually be negative, with the actual value goes down each year. Meanwhile you bought at an artificially high bubble price. How long will it take (if ever) until the actual value falls and then rises enough to match the purchase price, interest paid, maintenance costs, and lost opportunity costs?
Couple the above with a current deep recession in that the reasonable thing for any individual to do is to save as much money as possible. You should do so for a rainy day that becomes more and more likely as the recession deepens. My assumption is that you either do not have much savings or at the very least have stopped contributing to your savings as otherwise you would likely have considered refinancing with a bigger cash outlay (or make a big principle payment and asking the bank to reamortize the loan, which they would likely be more than happy to do these days if it reduces there loans outstanding on underwater properties).
You must ask yourself do you have enough savings to tide you through a very extended period of unemployment or large unexpected expenses if that should happen in the coming year(s)? If you lack those reserves trying to hold onto those properties may actually be even more destructive to both yourself and the banks whom lent you the money. By the time you fail you will have no savings, be worn out, and have an even larger deficiency judgment. Meanwhile the bank will end up with houses worth much less than they are now and possibly even larger repossession expenses.
None of the above morally liberates you from your obligations to the banks and if you can comfortably and safely do so you should follow through. However you should be fully aware of the ramifications of doing the morally right thing to do.
PS.
It occurred to me also that you can also try the following, assuming the banks agree which they should considering the current environment. Sell the properties and have the banks accept a note for the deficiency in each of the houses. Make sure that they do not try and get you on the interest or the term. The interest on the notes should be no high than what was on the mortgage notes since that is what they were already expecting. The amortization on the notes should be no shorter than that which remained on your loans since that is when they were expecting to be paid back. The banks might complain that the new notes are unsecured so they deserve more interest or a shorter amortization period but stick to your guns as they come out ahead in this plan anyway and currently they are undersecuritized anyway. Having the mortgages marked paid in full in your credit report should be part of the deal as well (or at least marked in a credit score neutral or positive way). Since its more likely that the market value is higher than the income value as it usually is, you should actually be able to dramatically lessen your monthly loss and eliminate any risk with owning these properties. As for taking the monthly loss via the notes just remember that otherwise the loss would have been much higher and this way you would be fulfilling your moral obligations.
PPS.
You may also want to speak with your accountant on any current tax savings. You can take a depreciation expense tax deduction on each of your properties. Depending on your tax rate this can be substantial and help mitigate you current yearly loss. (1/27th of the purchase price (- land value maybe)) This usually works out more like a free loan as when you sell you have to figure in the depreciation used when calculating the taxes paid on the sale price. However if you sell at a loss some or all of the depreciation deduction is locked in and you get to keep some of that deduction for free.
While it will cost a lot of money to keep afloat, you’ll be better off in the long run. Think about this. You have income producing assets. Think about having 50% of the rental income in your pocket when the mortgage is paid off (the other 50% would go toward the other costs associated with the property). If these properties each produce a rental income of $1000/mo., you would have $1,000/mo. in your pocket from these 2 properties. How many hours would you have to work at a job to get $1000. I would estimate that you’d spend about 4 - 6 hrs./ wk managing these properties. If something happened where you were unable to work, you’d lose that job and the income. You could always hire someone to manage your properties if you can’t. Then you’d still get income. If you have enough properties, you could have a lot more income for the time spent, than you would get at a job. What I like the most is the fact that the income never runs out… theoretically… If you start tapping savings, 410k, etc… for retirement, it will run out at some point. That’s not the case when you have positive cashflow. You could even do a 50% LTV cash out refi and stuff the money in the bank. I’d keep a minimum of 2 yrs. mortgage pmts. in reserve if you do this. Then you won’t have to worry about making pmts. in tough times.
The resson I said all this was to show you the long term possibilities of the type of assets you have. THAT’S A VALUABLE ASSET!. If you have to work a second job during this tough time to make ends meet, it’ll be worth it in the future.