Investor owners may find themselves confronted with troubled properties due to changing market conditions, finances, or investment goals. A common scenario is the real estate investor who bought with unrealistic expectations before the bubble burst, failing to obey Jason’s golden rule, “the property must make sense the day you buy it.”
Jason offers options that can help investors cut their losses in this circumstance, with the caveat that these tips are not intended to replace legal or tax counsel.
Obtain a Loan Modification
Heading the list of available alternatives, loan modification is a fairly new option introduced in the midst of the foreclosure crisis. It is not always easy or a surefire solution but it can often be accomplished without harm to your credit. Furthermore, instead of spending thousands of dollars per modification for a loan modification service, it is possible to learn the process yourself.
Refinance
At present, refinancing is problematic. Although federal programs may ostensibly provide help even for borrowers with upside-down mortgages, in reality refinancing is rarely an option if your property is in real trouble.
Sell to Your Tenant
Aside from loan modification, this is the next best route. The first step is consulting your property manager – who may be motivated by the chance at a commission – and expressing an interest in a regular or short sale to your current renter. Present this as an opportunity for your renter, not an ultimatum; reassure your tenant that you don’t intend to sell the property out from under them.
Negotiate a Lender Compromise
To avoid foreclosure, make an offer of a “deed in lieu of foreclosure” where the property title will be transferred to your bank or lender. While they aren’t obliged to accept your proposal it is in their financial interest to do so and sidestep the time-consuming foreclosure process.
Allow the Property to be Repossessed
Even though foreclosure or bankruptcy have long-range credit consequences, many borrowers are making this moral leap and opting for strategic default – exploiting the delays in the system and trying to time the market to later cash in on distressed sales. But this is a risky gambit at best.
Negotiate for a Deficiency Judgment
This option will depend on whether you are dealing with a recourse or non-recourse state, because in the latter lenders are limited to pursuing property as collateral. Moreover, although lenders may have the right to pursue borrowers, they are unlikely to choose tedious litigation to recoup through a deficiency judgment, especially in light of the millions more impending foreclosures on the market.
The “Rent-to-Own” or Lease Option
One great way to increase cash flow and get a better tenant (or make your existing tenant better) is to do a lease option – more about this on another show.
Remember that it is important to be familiar with the tax implications of any actions. Explore all your options, and the best place to start is by contacting your property manager. This article has been based on content from Creating Wealth episode 153.
Subscribe to the Creating Wealth Podcast in iTunes or listen online.
