I am an investor of some properties that provided me 2 full years of income to pay for the monthly mortgages - so I am breakeven perfectly for 2 years. At the end of 2 years, when the lease-back monies evaporate, I will no longer have the means to pay for the properties. Now, this may or may not be the case, it really depends on the outcome of the property potential. At any rate, the properties are in my personal name, and while 2 years away gives me room, I am wondering what happens if I was forced to foreclose on these mortgage loans because the invesment does not pan out as expected. The loans are in my name of course, and so are the titles of the propoerties. If I was forced to forclose on the property, what is the range of effects it would have on my personal 401K’s and IRA’s for the corporation I work for? I am not self-employed, I work for a multi-national corporation, so that’s where these saved funds are.
Bottom line is I will not have nearly the needed income to support the debt, and feeling like I have made a grave mistake. That’s the pessemestic view, while on the other side, I can only hope I can sell and breakeven. If I do sell and have to bring money to the table, we are talking hundreds of thousands that I don’t have… so just wondering if I can generate some discussion around anyone that might find themself in this position a couple years down the road - and help understand how I can be better prepared. Thanks for any help or advice for those who have been in this situatoin before, or now currently.
Bottom line, what happens to me if I had to forclose on the investment properties?
First of all you don’t foreclose on the mortgage loans, the lender/servicer forecloses on them.
Whether or not the lender can seek a deficiency judgment against you depends on the laws of the state in which the properties are located. You didn’t say what state they are in.
Sorry for showing my ignorance on the wording and subject. The properties are in Florida. I’m thinking of worst case scenario here, just been thinking about what happens to me in the event the lender forcloses on the properties and what the process is, how it works, how my 401k or pension savings can be affected… if it came to that. Thanks for your comments.
Let me verify: The person who sold you the building is leasing it back from you, right?
Are these commercial properties?
If I’ve got that right, does he have his own business in the building? Is the rent he is paying close to or lower than market rent for the area? Is his business successful?
If the answer to all 3 is “yes” to all three questions, then you have a very good chance that he is going to renew the lease.
If no one is in the buildings, you can start looking for a new commercial tenant right now. The seller will be glad to turn the leases back over to you if he is paying rent ion empty buildings (make arrangements in advance).
Have you done any market research? What is the going rate for rent in that area? It will be so much per square foot if it is commercial.
Or are these residential? If so, have you done any market research to see what fair market rents are for the area?
If it is residential, you do what the rest of us do and wait until your tenant gives notice and then you start looking for new tenants.
Just because tenants have a 2 year lease does not mean they plan to leave at the end of 2 years. They might renew the lease and stay there.
Pay attention to your buildings and make sure they are in top condition and have good curb appeal. Then, if your rent is set at market rate, you simply get a new tenant to take over when the old one leaves.
You make decisions with the info you had at the time of the decision. When you got involved with this, you had all your variables well in hand. But the idea that you are working working with either Plan “A” or financial death has to be more than a little disconcerting. Your exit stratagy right now seems a bit weak.
My advice is to move to sell the building right now with the tenant and lease in place. It is most attractive now when it is occupied, the rates are low, and you have structured the asset “package” very attractively. And you might end up with a profit.
In the end, you mitigate risk by having a tight plan for the turnover of your asset. The rate of return on equity is very tightly tied to the cost of capital in a highly leveraged investment. We have spent $1.85 trillion on war and that is reducing the value of the dollar. That translates to higher inflation (1% inflation last month) which can only mean higher interest rates in the near future. For your state of mind, start your exit stratagy right now. In 2 years, you will look back at today as “The good old days”. (I regret the intern’l economics but I felt that you might be unaware of how the situation is unfolding, in my opinion, and I have an MBA in International Finance from NYU.) Best of luck.
excellent feedback -
The situation is I have a couple propoerties in which the company paid me $175,000 cash to pay the mortagage debt for the 1st 2 years. (a 2-year leaseback agreement) In essence, I took out new mortgagaes on 2 propoerties that are being upgraded. At the end of the 2 years, I clould either take a share of the rentals, sell the units, or sell the units into a REIT. Today, the company that paid me has gone under and is no longer in business, new property and marketing management has taken over the upgrade plans with uncertainty as to the extent these plans will be executed, and I have a couple properties with unpredictable values that were appraised based on the Master planning of the units/complex. While I generate income and pay my debt over the next two years with no issues, once the 2 years is up, I will not be able to continue without the rental incomes supporting the debt. Also, selling each unit is fine, but if I have to come to the table with 150K (as an example) for each unit, I will not have those funds. So I am trying to understand the options that exist via a fairly complex situation I got myself into. If for example I sell when the 2 year lease is up (which was the original plan), and I have to come to the table with $300-400K which I do not have, then I am not sure the best routes I should be planning today. I appreciate all your continued feedbacks. I know I made a mistake, and now trying to stay on top of it 20 months before I need to make some decisions.
Your 401k plan is most likely ERISA-qualified which means creditors can’t touch it. Some states offer similar protection to IRAs. Some don’t. I can’t speak for Florida.
I think you’re going to be in a tough situation and you need to be talking to more people than those on this forum. Without more information, this is just a basic guess as to what will happen. The lender will foreclose once you can’t make payment. This basically destroys your credit rating and will make it very difficult for at least two years to buy any kind of property. I think it may also stay on your credit report for at least 7-10 years.
Also for investment property, you’ll probably get a 1099 for the difference. If it’s 150k per property, you’ll get a 1099 for 300k. Then if you’re in the 25% tax bracket, you’re going to owe 75k in taxes and the IRS can put you in jail if you don’t pay. You might be able to declare bankruptcy to avoid some of these problems, but it would probably wipe out the money you’ve saved and I don’t think bankruptcy avoids IRS liens. You could consider a short sale where the lender allows the sale to go through without requiring the balance from you. Usually slightly better than foreclosure as the price tends to decline more once it’s foreclosed on.
Really you need to consult with a few other people, not sure if those scenarios are correct, a good CPA or attorney or tax adviser might be able to come up with ways to minimize your losses. You might even be better off not paying the mortgage now, but once you start down that road, it’s hard to pull out as you could be ok if you found someone to rent the property.
I feel your pain. I was caught up in the same situation with some properties on the east coast. The company that set up the deals honored their commitments for about 7 months then went under. Now I’m stuck with a bunch of mortgages I can’t afford.
You’re very smart to recognize the train wreck that’s up ahead in the next 2 years. Unless you sell these properties in the next 6-12 months, you’re going to have protect your assets (401K, retirement savings, college savings for kids, equity in primary home, etc.). That means having to face the cold reality of filing bankruptcy. The fact is the Florida real estate market is going to take years before it recovers so you have to take a very defensive approach to your situation. Many investors get into trouble by simply riding it out and betting the market will turn around. You can’t afford to do that becauser these properties are in your name and could possibly expose your assets.
Fortunately, you live in a very good place to file bankruptcy. Florida is very debtor friendly. You’ll be able to keep the house you live in plus any retirement savings accounts, 401K’s, IRA’s, and college savings accounts are all exempt from creditors. In addtion, you’ll most likely keep all of your personal possessions and probably a couple of vehicles. Any cash you have in the bank or in a stock or mutual fund accounts are not protected. The good thing is you still have a lot of time before having to file bankruptcy. You don’t need to file until the lenders have started the foreclosure process, which is 3-5 months after you stop making the payments. You’ll also get plenty of offers to do short sales on your properties. That won’t benefit you at all because even if the lenders agree to a short sale, you’ll still be hit with a 1099 for income on the foregiveness of debt. You don’t want to get caught having to owe the IRS tens or hundreds of thousands of dollars and expose yourself to having your wages and bank accounts garnished or liens placed on your primary home. If you file bankruptcy then all of these debts become fully discharged and you walk away clean and with a “fresh start”. You would need to be sure you file before the bank forecloses on the first investment property.
You’ll have a bankruptcy on your personal credit that will hinder your investing efforts for at least 2 years but that’s a lot better than having to pay hundreds of thousands of dollars in deficiency judgments and taxes to the IRS. I would definitely start consulting with a bankruptcy lawyer now to develop an action plan for yourself. I had to do it for the sake of protecting myself and my family. Bankruptcy lawyers are not cheap so you want to make sure you have some cash available to pay him/her (around $2500 to $5000). You’ll probably need to file as a Chapter 7 business case because of the investment properties.
I wish you the best. I really hope you can get these properties sold right away while they still have some selling points like the 2 years guaranteed mortgage payments. If it doesn’t work out, don’t pay on the mortgages because you can’t afford it. Don’t tap into your assets to try and keep them current. That would be throwing money away.
I would also Google “Bankruptcy forums” and you’ll find a lot of good discussion boards regarding bankruptcy. You’ll find a lot of investors like us who had failed ventures and had to file. There’s a lot of valuable information for you to learn how to protect your assets and plan. It’s not the end of the world. You’ll be able to come out of it very well because of the state that you live in (Florida).
One last thought. It sounds like this was some sort of big development. That means that you weren’t the only one who got conned.
Maybe you can get together with the other owners who are in the same boat as you are and form a home owners association and figure out some way to add enough value to the properties to bail all of you out.
To BURN and TATERTOT, I really appreciate your feedbacks on this. Keeps me thinking on the right direction. To BURN, my primary residence is in Colorado, so not sure how that would affect my bankruptcy position, however, I would only consider that as a last resort of course. In addition, I am aware and would prepare myself to pay the legal counsel should it come to that conclusion. I have 20 months, and I am optomistic the situation may not require me to take such drastic measures. But I do want to have a proactive thought processes as we move from one quarter to the next right into the summer of 2009. This forum has provided me with real peole in real situations and the advice/support you give is priceless. Thanks, and my ears/eyes are peeled to listen to your inputs. Thanks!!!