Let's say you have 5 properties that - due to economic and job market conditions in the area - only command enough rent to barely cover mortgages, insurance, and taxes. Nothing left over at all for maintenance, repairs, capital expenses, vacancies, etc. Your personal budget is strapped. You no longer have any extra cash flow to cover the next major incident for any of the properties. The properties are already mortgaged up to the point where there is no equity available to cash-out with a refinance. All 5 properties are currently rented, but you know it is only a matter of time before a tenant stops paying, or catches the kitchen on fire without renters insurance (that they let lapse), or any of a million other probable issues. Is defaulting and continuing to collect rents until the banks foreclose a viable option? Would destroying your credit destroy your life? Or would freeing your cash be enough to counter the negative impact? What do you do? What can you do? I guess the real question is: At what point and to what extent is a strategic default (or multiple defaults) a viable option?

Before I defaulted and went back on my word, I would downsize my car, pay off some personal debt to increase my cash flow, cut my lifestyle, sell stuff, etc. They are rented, so just save up the money for an emergency. Tenants without renter's insurance is not your problem. Insurance on the property is. I would get a second or third job before defaulting. That is just plain dishonorable.

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

I didn’t hear no equity i just not enough equity to cash out. So why not sell? Save the credit and walk with a little cash?

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.

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

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.

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.

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

Charles McPherson

Investor · Florence, SC · Member since 2014 · 16 posts · 5 votes

8y

I am in the Florence area... if interested in selling contact me.

2 Reply

Jeremy Henry

OP

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

8y

Thanks, all! I am seeking a legitimate way out of these. I have a full-time career in IT working 60-80 hours per week. I pose the worst case scenario to get feedback. And all of the feedback is MUCH appreciated! Contrary to what it might appear, I am not looking for approval to default. Simply trying to analyze the pros and cons and available options.

I will post more details, and I will search for investors in the area that might be willing to partner to get these sold.

I prefer not to default and will continue to seek out every alternative. That is what I'm looking for: real alternatives. But in the end, if it comes to it, I also recognize that you don't need credit when you have cash (despite what this culture tries to instill in us). I can buy a Ferrari far cheaper for cash than you ever can with a loan and great credit. My reputation in real-estate in that town (or anywhere) is of little concern. I simply need to find the best business and cash-flow options at this point. If I can save my credit and not be screwing anyone over, too, then that would be a path I would prefer.

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Jeremy Henry

OP

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

8y

@Al D. LOL! I was TRYING not to go there! I ALMOST wrote something to that effect, but deleted it before posting. LOL! (You are awesome!)

For the benefit of the community and home prices in the areas, I prefer to a more "legitimate" approach. But on the other hand, if it comes to it, the world isn't fair and has screwed me over enough times... and, as I've been told before, "It's just business."

1 Reply

Scott W.

Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes

8y

people on here are too much about the rah rah in real estate. you are one of the few that posts the real side of RE investing. I'd say 90-95% of the people out there do 1 deal, lose $, and quit.

I keep hearing working 3 jobs. lol, like that's gonna pay the 5 mortgages.

you were honest and truthful, which is much appreciated.

you have depreciation to help get you thru the repairs. of course, if/when you sell, you have to pay back the depreciation.

I don't think your market will be depressed for that long. anything can happen but I think it will come back. I had a towhhome where comps were going for $35k (all foreclosures needing work) some 7 years ago. today? nearing $100k.

there is a saying out there "things aren't as bad as everyone says it is and things aren't as good as everyone says it is." let that sink in. hang on and good luck, buddy.

4 Reply

Al D.

Investor · San Francisco, CA · Member since 2017 · 303 posts · 327 votes

8y

Jeremy Henry Since someone decided that my original post was “political,” (I mean, I can see how. But it was also factual - and to the point. But ok.) let’s try this again, without any “politics:” For anyone who forgot what you asked: You asked, “At what point and to what extent is a strategic default (or multiple defaults) a viable option?” While I cannot tell you what your “technical” options are, I must say this: Under Article I (One) of the US Constitution (so, a long time ago, when They were still thinking about ensuring justice, tranquility, common defense, etc., They also thought of this concern,) Congress is responsible for establishing laws on the subject of bankruptcies. They’ve been doing that ever since. You have that option today. You should not care whether someone may see it as harming your reputation, jerk-like, etc. These people are not you. I’ve never done this. Would never want to. In fact, I was on the “receiving end” of a bankruptcy once - my large business investment was completely wiped out. My reputation is certainly important to me. So is not being a hypocrite. When the law allows you to do something - and you’ve used up all other “viable” (for yourself/your family) options, this is still an option. I don’t know who your mentors were. I wish we’d spoken before you made the investments. But you are where you are today. Strategic defaults happen. People and businesses recover from many of them. You don’t have to be called a jerk for that. Best of luck.

3 Reply

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

8y

Were these bought as investor properties from the lender ? If so you may have signed an assignment of rents which means if you default they can file typically a pretty quick judgment and the s tart taking the rent payments from you and they go direct to the lender. Then once you default the fees and unpaid interest continue to accumulate and they will do one of two things, file a deficiency or see what assets you have and slap a lien on your primary residence for the deficiency so you will be stuck in your primary which you cannot sell not a house you can buy because your credit is wrecked and your only option is BK. Keeping them you said pays nominal return but your paying down the equity so you should then have a better shot of selling them.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8y

This feels like the cautionary tale for the bull market of 2012 - 2018.

Lest we forget history - Although there were bad lenders and bad banks and shady wall street types creating derivatives and bundling them to unwitting investors. The trigger point for the crisis was not those actions.

The trigger point was the default rates of investors and home owners who either bought too much property, or didn't run the investment numbers correctly, or believed that appreciation was guaranteed in the constitution, or got "surprised" by any one of several nasty events that should have made their way into a cautious investors proformas.

So we can blame the banks and yes they have some culpability but ended up with none of the pain. But the trigger was investor default - both unintended and strategic. Wanting the upside without accepting the downside.

Kudos to you @Jeremy Henry for trying to be responsible. I'm sorry it didn't work for you this time. And you may have listened to the wrong people. But you're where you are and it's gut check time. Hang in there and find a way to honor your debts. It won't be easy but for everyone who makes bad decisions and owns up to the consequences of those decisions one other will not have to share those consequences. And it's not as bad as you think. As anyone who held on to property from 2007 - 2017 even though it hurt them what happened - nothing. The value went down and the value went up. They had some tough times with rents for a bit. But in the end they did OK.

Tough times don't last. Tough people do.

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Anthony Dooley

Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes

8y

My only hope is that your bad hypothetical experience will somehow show these up and coming investors that real estate doesn't always make money. Buying with low or no money down and hoping that you can raise the rents in the future is a dangerous plan. It sounds like you are going to default on these either way, so good luck with that.

1 Reply

Jeremy Henry

OP

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

8y

I appreciate the support and advice! Interesting and insightful discussion.

These properties CAN all be good investments and/or great homes for someone... We have always been very proud of how well we maintained our properties - we had very high standards. We just ended up over-leveraged and too optimistic regarding future costs. Originally, 3 of my 5 were intended to be flips. But we made the mistake of expecting to sell for full (or near-full) market value. When that didn't work, we converted them to rentals. But we never really analyzed them as rentals. We never charged enough rent, or - for whatever reason - were unable to find good prospective tenants that could afford the asking rent and so ended up lowering it to get a tenant. Bad move, I realize in retrospect.

I hope some new investors read this and avoid the mistake of being too optimistic when it comes to considering and planning for future expenses.

3 Reply

James Galla

Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes

8y

You're overleveraged, and that is a high-risk game. I'd probably sell all of the properties. The only circumstance that I would allow a property to not cashflow is where I could pay off the mortgage quickly and then get it cashflowing. Specifically, the payoff period for me would be less than a year. When leveraging, it is important to ensure there is a positive cashflow.

2 Reply

Ron T.

Investor · Sharon, SC · Member since 2014 · 77 posts · 40 votes

8y

Originally posted by @Jeremy Henry:

I appreciate the support and advice! Interesting and insightful discussion.

These properties CAN all be good investments and/or great homes for someone... We have always been very proud of how well we maintained our properties - we had very high standards. We just ended up over-leveraged and too optimistic regarding future costs. Originally, 3 of my 5 were intended to be flips. But we made the mistake of expecting to sell for full (or near-full) market value. When that didn't work, we converted them to rentals. But we never really analyzed them as rentals. We never charged enough rent, or - for whatever reason - were unable to find good prospective tenants that could afford the asking rent and so ended up lowering it to get a tenant. Bad move, I realize in retrospect.

I hope some new investors read this and avoid the mistake of being too optimistic when it comes to considering and planning for future expenses.

I own 2 properties in the area. (20 in total) I'm cash flush and looking to expand.

If serious message me and lets talk.

Ron

1 Reply

Troy GandeeBusiness Member

Real Estate Broker · Charleston, SC · Member since 2013 · 794 posts · 454 votes

8y

@Jeremy Henry I would probably peel out two or three that will face the most capex or perform the worst and try to sell those. Even if you take a loss. You could also try to offer a portfolio to someone. I would try my best to hold them, but if I were facing default, I would try to liquidate or shave my personal expenses down as much as possible.

0 Reply

Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

8y

Something doesn't make sense. I just found this analysis of "hypothetical" Florence, SC:

Florence SC Analysis

Unemployment rates are not particularly high. About half a point higher than the rest of SC and a point higher than the national average. Certainly not a symptom of a depressed area.

The population is not aging - there is a strong mix of working age population 20-60. There is a fair amount of people above 60, but not statistically significant when compared to SC as a whole.

Population in general has been rising steadily since the 70s with future growth predicted

77.2% of the population live and work in the area.

There are over 4200 employers in the area with 135 employers hiring 100+ employees

Healthcare, Insurance, Government, Food Production and Energy are among the top employers - that's a great mix of white collar to blue collar to semi-skilled labor.

Wages in the area average in the high $40s

There is a 1.1% increase in labor needed year over year for the next 6 years. (Not stellar, but not awful

Population with Bachelor's degrees are growing steadily year over year. Master's degrees hold steady.

So..... that said.... this is not an economically depressed area. It's not Denver or Seattle, but it's not horrible.

I am not sure why you can't get quality tenants in there, but after diving into those population statistics, I'm halfway interested in the area. I've been looking in North Carolina, but shifting a couple miles south would be no big deal if the price were right.

Throw the houses into the BP marketplace. Let me know when they're there. I'm sure somebody in BP will take a look at what you've got and believe they can do better than you can.

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Russell Gronsky

Specialist · Baltimore, MD · Member since 2016 · 384 posts · 318 votes

8y

@Jeremy Henry, one thing no one mentioned is....what about a portfolio lender? If you have some equity in these properties, you might be able to convince a local bank to take a chance on you.

0 Reply

Rachel H.

San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes

8y

@Jeremy Henry You'll need cash reserves just in case something happens. Another option would be to take on a partner. Good luck!

0 Reply

Bill S.Pro Member

Moderator

Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes

8y

@Jeremy Henry sounds like you have a management issue. I know managing out of state properties can be challenging. My guess is that your local manager is charging you an arm and a leg for services. Their management fee and they maintenance and repair costs are probably over priced. Perhaps you could find a local retired person to help you manage. You are going to have to carve out some time and money to solve your problem. If you keep doing what you've been doing you are going to keep getting what you've been getting. When you can't sell a house, it's over priced. That's the reality. You haven't really spoken to equity. There is a way to tell what the market price of your property is. List the property and then drop the price 5% each week until it sells. Eventually the properties will sell no matter how much the locals may not want to buy from the out of towner.

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

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

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