BiggerPockets

His only choices:

1) Raise rents
2) Lower expenses
3) Pray for inflation or at least increased demand for rental housing.
4) Sell at a loss
5) Walk.

His choice depends on his perception of how fast rents/house values will increase over the next 5 and 10 years.

He has a negative equity position of $75,000 today. He loses about $3,000 per year.

If he made $5,000 per year in profit, then it would just be a matter of waiting for the profits to wipe out the existing loss. At $5,000 per year in profit, that is a 15 year wait to break even.

One other factor are HOA fees/dues. In down times, HOAs tend to postpone fee increases and postpone maintenance. When the market improves, they play catch up.

If I were in that position, I would take my lumps and sell or walk.

What is your BIL's personal situation? Living paycheck to paycheck? Or, has good income and some money in the bank. If he had bought $100K in stocks that were now worth $25K, he could sell and still have the $25K. The downside to leverage is you can defer that loss until you sell. So, now he's stuck coming up with the $75K loss.

CA is generally a non-recourse state. Meaning the lender can only take the property and can't seek a deficiency judgment. But if this was an investment loan, that might not be the case. He should read his loan documents. Even so, the lender will send a 1099 for the forgiven debt after a foreclosure sale which will result in an ugly tax bill. There are ways to declare insolvency with the IRS to avoid that bill, which is where the personal financial situation comes into play.

Seems unlikely this will ever turn profitable given how far underwater it is.

Since he's solvent he should honor his mortgage contract and kick himself for thinking he knew about real estate investing. My brother found himself in this same boat and blames who else but his mortgage broker of course. Since he's also solvent he is still on the hook for the mortgage balance left over from the short sale. And his credit is now mud.

I would hold on to it. The losses every month are not that big of a deal, in the end he has the renter pretty much pay off his own condo for him.
The reward in the end of owning it outright and only having had to pay <$250/month to do that is going to be bigger.

I would do all the following:

1) Raise rents
2) Lower expenses
3) Pray for inflation or at least increased demand for rental housing.

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Appreciation will eventually kick back up, and he will end up with a free and clear condo for just <$250/month... better than taking 7 years of crap on your credit, and in the end probably costing you WAY MORE than $250/month due to increased interest rates, declined loans, etc because of the bad credit.

7 years is a long time to be ******** for credit... he never knows what opportunities he will miss due to this or what increased costs he will realize due to his bad credit... and all over $250/month...

Don't know what he's getting in rent. Would it make sense for him to buy one of 20k condos to wash out the loss on this one. He could also try to move the renter over before selling the underwater one if he really needed to.

Yes you can do portfolio averaging IF the seller wants more properties or actually has the money to buy more.

After this experience he may simply be done for now with RE investing.

Maybe a DIL?? The problem with short sales if you are solvent is the bank asks for a bunch of financials and assets.If they deny the short sale their attorneys now have a bunch of disclosed assets to pursue that may or may not have been easy to find.

You will see this on short sales.Owner applies and only sends in certain documents or banks ask for more documents.Seller that is solvent says no way am I giving you that info and just foreclose.

So in those cases sometimes it's better to not give financials and just let it go.He could just keep the cash flow payment and not pay the mortgage until it forecloses.Many do that today and it happens with commercial real estate as well.

I am not going to debate morality as that is different from the law.Just saying what goes on in the real world.

Is the subject property in Sacramento CA???

Yes it's in Sac.

This may be a bit dirty but I know of folks down here that are collecting the rent and not paying the mortgage....waiting for foreclosure to happen. We do have a law here that condo associations can go after tenents if the condos fees aren't paid so if you go this route and have a similar law, pay the condo fees. I think this would be better than having the place vacant. I would also not let the tenant know, they might stop paying....

Not the best advise but I just know of a few folks doing it and also have some friends that were renting and received foreclosure papers since they occupied the dwelling....

just a thought.

Some great insight here. I believe the condo was his primary residence, and he decided to rent it at some point. He never really bought it as a rental, so I believe that after the PITI is paid and the condo fees and management co, he is $250 in the hole per month. Obviously he could self manage, but he already works 12-14 hour days and doesn't have time. I will have to ask about the other details.

Thanks!!