I Need Help - Short Sale, Foreclosure, Keep House??

General Real Estate Investing
1

Hi. I was hoping you could help point me in the right direction.

I co-own a rental house with a partner and we just got the appraisal back, which indicated a value of $40,000. We bought the house in 2006 for $80,000 and we now owe ~$92,000 on it. We must renew the loan with the bank. This bank is regulated by the FDIC.

The lender said that he will renew the loan as long as I sign a new lease with the current tenant. He says that if I do a short sale, the remaining balance (over twice the amount of the current value) will be treated as taxable income by the IRS, thus I will have to pay taxes on it. A foreclosure will destroy my credit. If I keep the property as a rental, who knows when/if the value will ever return to the amount I owe on it.

My questions are:

Should I do a short sale?

Should I let the house go into foreclosure?

Should I try and keep the house and sign a new lease with the tenant even though I owe over twice what it’s worth (perhaps I can renegotiate the loan with the lender to give me a better interest rate, terms, etc.)?

Also, the other owner would like to have her name removed from the deed. Is this possible by signing a reverse quitclaim deed or something?

Any help is much appreciated. Thank you.

2

One simple question - Is it cash flowing?

3

A short sale will damage your credit almost as much as a foreclosure.

Yes, a quit claim deed can be used by the co-owner to remove her name from the title. However, if the co-owner is also a co-borrower, a quit claim deed will not release her from liability for the loan. A short sale, or foreclosure, will still adversely impact her credit score even after her name is taken off the deed.