In a pickle... Default on 5 properties, or hold out?

OP

Boerne, TX · Member since 2018 · 8 posts · 5 votes

8y

Thank you for the replies. Let me add some more detail to the scenario (hypothetically...):

The market in the area is very depressed. 2 of the homes are Class B homes in a Class A neighborhood. Both were on the market at a drastically reduced rate just to break even, VACANT, for 2 years. The market in the area simply can't get them sold.

The other 3 are Class B in Class C neighborhoods. Also, each of them has been on the market to sell off-and-on over the years, and none of them would sell... not even a legitimate nibble. The market - and every real-estate professional in the area - simply could not get any of the properties sold.... and they are nice properties - very well maintained. It would appear that the kind of people that CAN get a mortgage are looking for something higher-end, and the people that could AFFORD the mortgage on these lower-end homes do not have the credit or wherewithal to ever be able to own a home.

None of the homes are "upside-down", per-say, but something is only WORTH as much as someone is willing to PAY... and so far, all indications are that no one is willing to pay anything.

The area has a combination of an aging and low-educated, low-income population with very little "new blood" being attracted. The only new jobs that have been created in the last decade have been low-wage (< $15/hr) jobs. The prospects of selling the properties looked much better 8 years ago, and has gotten progressively worse since as many major employers moved out of the town.

From an investment perspective, the numbers indicate that the properties will only yield - at best - an average of 3% APY over the next 20 years or so given their history of expenses and anticipated future repairs and even considering appreciation.

There is no cash available from any sources to set aside and save for eventualities. You are already working the equivalent of 2 jobs and have 2 teenagers at home to raise and (hopefully) put through college in a few of years.

Not a question of honor. Simply a question of finance. Is it fiscally responsible - from a personal finance stand-point - to hold on to these properties? Or should you cut your losses and take the money you would be continuing to pump into these properties to invest it elsewhere?

Mike Chern

Investor · San Antonio, TX · Member since 2016 · 76 posts · 25 votes

8y

Why don't you list the property in sell by owner site, add some nice picture. You never know what will happen. It doesn't hurt anything. I can sense you are a bit tired and feel depressed. Just hang in there.

Chris Szepessy

Catskill, NY · Member since 2018 · 636 posts · 668 votes

8y

Have you asked any of the tenants living in the units if they're interested in buying? They probably fall into the "don't have the credit or wherewithal to own a home" though.

Also, instead of defaulting, you could try a deed in lieu of foreclosure. Your credit will still take a hit, but not nearly as much as 5 foreclosures. There may also be tax consequences for doing that, so check with a CPA. In the meantime, like @Mike Chern said, list them FSBO. Facebook marketplace reaches hundreds/thousands of people quite quickly. And it seems to work well around me. Good luck! Hope things work out for you.

Ron Fletcher

Leclaire, IA · Member since 2016 · 161 posts · 130 votes

8y

Your profile says boerne Texas which I don’t think is horribly depressed economically. How can it be that all of your properties are in this dilemma. I would reach out to other investors in your immediate area. Show them the properties and the numbers. A fresh perspective may help you see a way to salvage your properties or perhaps they could buy you out.

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

I would consider lease options if that's a possibility. I would short sale them if I had no other choice. If I were 25 years old, defaulting could be a solution, albeit a last resort after exhausting all other options, but where I am now, defaulting like that would ruin the rest of my life, so I would avoid it at all cost. I would work 24 hours a day to avoid that.

Podcast Guest on Show #222

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

couple things come to mind I can't talk about how to hold or sell as i don't know your area so I will just comment on the walk away.

if these are in Texas .. thats a dual action state so at the lenders discretion they can foreclose and SUE on the note and get a deficiency.. so depends on who the borrower is.. NOT who is in title today. but who signed the NOTE if its you personally that could happen.

your credit is shot for a number of years in this scenario i would talk to a good Lender about how they treat credit these days.. some say its just a few years. but your credit will be trashed for some amount of time.

so that can hamper you on many fronts.. Deficiencies were outlawed during the crisis but that has sunset.

Also the lender once they do this can do a 1099C which delineates how much they lost and its EARNED ordinary income to you.. so now you have federal tax issues to deal with..

so thats the bad that can come from strategic foreclosures.. they work in CA OR WA NV AZ those states i know for OWNER occ loans its against the law to seek a money judgement but you could still have the 1099C issue to deal with although in those states if you bought after the crash your probably not running into the issues you describe above.

Owner financing to others and Pray is a good thought as some have suggested.. you know there are thousands on BP that are dying to get into the landlord business maybe you can find one that has limited cash but will take these on just for the privilege of getting started. why i don't know but you never know.

JLH Capital Partners51 Review

Website View Page

4 Reply

Jason M.

Real Estate Investor · Minneapolis, MN · Member since 2012 · 47 posts · 26 votes

8y

Walk away if it makes sense to you and you cannot sell or financially support the payments anymore. It's a business decision and nothing more. If a business is insolvent it files for bankruptcy and sells everything at a discount...I see little difference here.

Jeff Filali

Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes

8y

I'd sell them to the tenants on terms, try to make it where their payments would be just slightly above current rent, maybe even try to get a down payment, it is tax time and most tenants have a tax refund to spend. That eliminates your need to worry about repairs, they become responsible, they pay the note, taxes, and insurance, plus you may have a little cash flow. Most will take better care of the properties if they're buying them, and are better about paying also. Even if they defaulted down the road, at least it buys you some more time. You can also sell the notes in the future after seasoned. There's definitely better options then walking away and ruining your credit.

4 Reply

OP

Boerne, TX · Member since 2018 · 8 posts · 5 votes

8y

Thanks again, all! FYI, these properties are not in Boerne or even in Texas, they are in South Carolina (1500 miles away) - hypothetically... :-) I'd LOVE to own properties here! LOL

It just gets deeper and deeper from here...

Multiple tenants have expressed desire to buy the homes, but they expect their payments to go DOWN, not UP... because they have no concept of finance and actually balk at the actual sales price (even at rock-bottom). So, unfortunately, there appears to be no way to raise the rent and maintain tenants (that will actually PAY their rent). The market in the area simply won't support it. Would have been good to have done the rent analysis FIRST, before getting in on these properties... Even then, the economic outlook of the area was better 8 years ago, but went down-hill and doesn't appear to have much hope of recovering. It's not Detroit, but it might as well be from an investment stand-point.

Even a VERY enticing Lease-Option - where an increasing portion of the monthly rent would be credited toward the eventual purchase of the home with good payment history year after year - couldn't gain any traction. And, in SC, even with a lease-to-own, the land-lord is still a land-lord and is legally responsible for maintaining habitability of the home - no way to offload the burden of maintenance and repairs to the tenant according to SC law.

There may also be other forces at work. Other investors, realtors, and powers in the area appear to be waiting in the wings and possibly manipulating the market to force investors like my "hypothetical friend" out - possibly due to some personal grudge or just so they can swoop in and pick up these properties from foreclosure. There is a known, tight network of collusion between realtors and certain investors in the area doing under-the-table deals. Think people play by the rules? Sorry. Welcome to reality. The world is much darker place than it appears.

Trying to auction and/or short-sale are possible options.

Wondering if anyone has gone through a default or short-sale and how that affected them...???

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

8y

I do not hesitate a single moment put the vacant property on the market to reduce my chance of losing all the rest of them. You have extended yourself to the max.

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

8y

@Jeremy Henry what area of SC are these properties located?

OP

Boerne, TX · Member since 2018 · 8 posts · 5 votes

8y

Let's say... Florence, SC. :-)

Podcast Guest on Show #21

Anthony GaydenPro Member

Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes

8y

Originally posted by @Jeremy Henry:

Thanks again, all! FYI, these properties are not in Boerne or even in Texas, they are in South Carolina (1500 miles away) - hypothetically... :-) I'd LOVE to own properties here! LOL

It just gets deeper and deeper from here...

Multiple tenants have expressed desire to buy the homes, but they expect their payments to go DOWN, not UP... because they have no concept of finance and actually balk at the actual sales price (even at rock-bottom). So, unfortunately, there appears to be no way to raise the rent and maintain tenants (that will actually PAY their rent). The market in the area simply won't support it. Would have been good to have done the rent analysis FIRST, before getting in on these properties... Even then, the economic outlook of the area was better 8 years ago, but went down-hill and doesn't appear to have much hope of recovering. It's not Detroit, but it might as well be from an investment stand-point.

Even a VERY enticing Lease-Option - where an increasing portion of the monthly rent would be credited toward the eventual purchase of the home with good payment history year after year - couldn't gain any traction. And, in SC, even with a lease-to-own, the land-lord is still a land-lord and is legally responsible for maintaining habitability of the home - no way to offload the burden of maintenance and repairs to the tenant according to SC law.

There may also be other forces at work. Other investors, realtors, and powers in the area appear to be waiting in the wings and possibly manipulating the market to force investors like my "hypothetical friend" out - possibly due to some personal grudge or just so they can swoop in and pick up these properties from foreclosure. There is a known, tight network of collusion between realtors and certain investors in the area doing under-the-table deals. Think people play by the rules? Sorry. Welcome to reality. The world is much darker place than it appears.

Trying to auction and/or short-sale are possible options.

Wondering if anyone has gone through a default or short-sale and how that affected them...???

In this theoretical scenario. You create a "perfect storm" situation.

So far you have told us:

-It is impossible to sell

-It is impossible to owner finance

-It is impossible to lease-option

-It is impossible to raise rents

-It is impossible to do anything that would prevent you from defaulting

You are feeding us this scenario almost as though you want us to come to the same conclusion that you already have come to. Well I disagree and believe that defaulting when you can actually pay the debts you owe just so you can collect the rental income and pocket it is shady as hell, dishonest, and shows serious lack of integrity.

Here are some of my suggestions.

-Sell the properties. No one may buy them for what you owe, but someone will buy them. You may have to take a loss, but they will be gone.

-Owner finance or lease option them. You said that the current tenants couldn't do it, well find tenants who can do it.

-Refinance the properties to get a lower payment that allows you to make a profit

-Work with the bank to coordinate a short sale

9 Reply

OP

Boerne, TX · Member since 2018 · 8 posts · 5 votes

8y

@[Anthony Gayden] ... Yep. Perfect storm, indeed. And agreed that defaulting and collecting rent is a jerk move. This IS the situation, however.

It's a puzzle. Not sure if there is even a right answer. Sounds like the wrong answer, though, is defaulting on all of them. Seems to be pretty unanimous agreement on that.

Let me phrase the problem in different terms:

What do you do, as an real-estate investor, when you realize you made a SERIOUS error/miscalculation and are now stuck in a very bad investment situation?

Edward B.

Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes

8y

I can tell you what I don't do. I don't just roll over an die, ever.

I agree with @Anthony Gayden, it sounds like you already made up your mind and just want us to tell you it's OK. It's not OK. You have shot every suggestion full of holes and joked about it being a "hypothetical" situation. If you want real help, provide real details and I am sure someone here can help you. It may not be ideal, but it will be a lot better than the woe is me, end of the world situation you want to believe you are in. Otherwise, just defualt. It may just be that this game isn't for you. It certainly doesn't sound like it is from what you've posted.

Podcast Guest on Show #243

Randy E.

Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes

8y

Originally posted by @Jeremy Henry:

What do you do, as an real-estate investor, when you realize you made a SERIOUS error/miscalculation and are now stuck in a very bad investment situation?

If the rents currently cover the mortgages, I would continue to rent them out, cross my fingers, and hope for the best. This is assuming you don't know of any repair expenses coming along. I might place one of the houses up for sale.

The thing is, you don't know what might happen in the next six months. Yes, two tenants could move out leading to more vacancies, and a $5000 repair could pop up. On the other hand, you might get a $50K inheritance that allows you to right the boat and ride out the storm.

The game is never over until the final buzzer sounds. If you give up now, you might be throwing in the towel when victory is just around the corner. It sounds like you've already accepted the possibility of defaulting. That's fine. But there is no need to accelerate defaulting. Continue to rent and wait and see. Maybe you sell one and can keep this up another nine months when something good might happen.

I assume you're using property management since you're so far away from the properties. Maybe that company/individual is part of the problem. Investigate other property managers and see if you can get a better deal on that. Or maybe you pay the same price but receive better service, as in the new PM reduces vacancies and maybe even raises rents a bit. Maybe, just maybe, part of the problem lies in the management, and not the actual "problems" in the area.

Or maybe you really did make a terrible purchase and things are going to end in foreclosure. I still say hold on as long as possible, try to sell while you hold on, and quit only when you've started missing mortgage payments.

Good luck,

Randy

5 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

8y

Based on what you posted, I think you probably just need to think outside the box a little bit. It doesn't sound like it's a state secret here, so for starters you might consider posting up one of the properties - including the address - so that other posters can take a look at the neighborhood, photos of the interior, the layout, and similar features to help you identify issues that may prevent the home from selling (because it sounds like you really need/want to sell). I will say that most people, myself included, tend to have blinders on when it comes to the properties they own - you look past the weird layout, or the factory next door, or the fact that there's 3 different types of siding on the house, etc. Florence is really one of the better places in SC, at least strategically speaking, and is reasonably large enough to sell a house. If you look at metrics, there's been plenty of appreciation in Florence, so if you've had these houses that long and they weren't refinanced on scam appraisals, there should be enough equity left over to break even.

Every house has a buyer at the right price.

Skyline Properties

View Page

5 Reply

Hui Tin

Investor · Flushing, NY · Member since 2017 · 17 posts · 7 votes

8y

@Jeremy Henry I would hold on too, if things becomes desperate, i would try to sell one of the property (one with the worst return) to cover the rest. If you default, you will never get back into the real estate business.

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

I'm awfully curious as to what area is more depressed now than 8 years ago? In that time I've lived in the southeast, mid-west, and currently the mid-atlantic, and everywhere I have been has see some appreciation o er the past 8 years. Hell, even Cleveland and Detroit are better now than 2010

2 Reply

Bart H.

Dallas, TX · Member since 2016 · 1k+ posts · 745 votes

8y

Originally posted by @Jeremy Henry:

@[Anthony Gayden] ... Yep. Perfect storm, indeed. And agreed that defaulting and collecting rent is a jerk move. This IS the situation, however.

It's a puzzle. Not sure if there is even a right answer. Sounds like the wrong answer, though, is defaulting on all of them. Seems to be pretty unanimous agreement on that.

Let me phrase the problem in different terms:

What do you do, as an real-estate investor, when you realize you made a SERIOUS error/miscalculation and are now stuck in a very bad investment situation?

I dont think you are stuck, I think you are building up the scenario and have convinced yourself you are stuck.

Have you looked into refinancing to lower the rates?
I would work 3 jobs, sell anything possible including my own house or car. If that wasnt enough, I would do owner financing, you can always lengthen the term or lower the interest rate to lower the total payment. You might also go to the lenders and if one of them is a credit union or small bank, maybe they would let you finance the difference with a personal loan so that you dont have to default on your loan.

When I sign on the dotted line to take out a loan, I believe I am giving my word. And above all else my word means a lot to me personally. I will repay my lenders if I can possibly do so.

2 Reply

Deb Somdahl

Investor · Gold Canyon, AZ · Member since 2016 · 14 posts · 5 votes

8y

@Jeremy Henry A few things that might be worth your consideration:

1 - Are all 5 in the same area? If the area is in decline, there may be other properties facing foreclosure. Have you talked to your lender to see if there is any relief they can offer? Is your rate decent?

2 - You mentioned you aren't upside down on them, so another investor may want to buy them. Even though you are frustrated someone else may be willing to take on. This may not be the big payday you sought - but it is sure better than destroying your credit/feeling like a failure.

3 - If the properties need cosmetic updating in order to sell, you may consider a JV with an investor or contractor who can initially cover rehab costs, it there is a margin.

All in all, you sound tired. Having a fresh set of eyes could greatly benefit you if you are willing to share more information with someone who can help.

Dylan Barnard

Rental Property Investor · Justin, TX · Member since 2017 · 134 posts · 57 votes

8y

Your reputation is everything, so don't trash it over a handful of properties. Find another way for sure. I'm sure you can find an out that doesn't involve destroying years of your life due to bad credit.