Mature Commercial Loan, Balloon Due, Way Under Water. Help Please

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Mature Commercial Loan, Balloon Due, Way Under Water. Help Please

Stephen Williams
Investor · Columbus, OH · Member since 2016 · 1 post · 0 votes

Hello there, I'll try and make this brief. I am a bit out of my depth here but my father has asked me for help so I'm doing my best. Basically to dumb it down in 2005 my father bought four properties right around the boom before the bust. These mortgages were packaged in one commercial loan in the amount of around 200,000. These aren't great properties and he uses them to pocket the difference of the mortgage payment versus the amount he gets in section 8 for the property every month. He's approaching 70 and pretty much bought his properties in hopes of never really paying them off and refinancing whenever possible to lower the payment and increase income. It's small potatoes but the man's just trying to work less. He also owns 9 other properties with a similar strategy.

So now the trouble. He gets a call today from his lender telling him he had been reviewing the loan and found that he was realistically under water a total of about $40,000 value wise from what the actual loan was. The loan has matured and the only possibility of keeping it is a $20,000 balloon payment that he could never come up with. He asked the man, "So can I just give you the houses?", the man said well we're not really at that point yet, this is more of a notification that it is a bad loan. The houses were mercilessly over-appraised. The bank never reviewed the appraisals and signed off on them. Thus he finds himself in a bad loan, with houses nobody really wants, and a loan that no other bank would want to touch.

The only nest-egg my dad has from all this is about $50,000 in equity from all properties combined. None are purchased under an LLC, they're all personal loans. The man has immaculate credit and has never missed a payment on anything in his life. So all that being said, I hope it makes sense what's going on. My questions are these.

1. Is there any way for him to get out of this predicament without them seizing everything he owns and potentially all of his accrued equity with it (including his own house which is paid off) ?

2. What would be the best starting point and course of action for him to take?

3. Have you or someone you know gone through something like this and what did you/they do?

4. What's going to happen to him from a bank action stand point?

I would really appreciate any advice you have. I'm not a real estate guy; my dad is just my best friend and I'd do anything to help him. Thank you so much for reading.

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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
10y

Might need a little more information to get specific but it sounds like dad has an interest only loan on section 8 housing.  We are at maturity and it doesn't sound like he really earned any equity through payments.  So that is a poor loan structure on both the bank and your dad's behalf.  

The good news is the property cash flows so it could support debt service but from the post we don't know how much cash is really available.  I suppose one of the issues dad may have with giving more cash flow to the bank is he loses his desire to own the property if he has no cash from it.  Might just have to suck it up and stick around to make things better or risk the bank going after him for a deficiency judgement.

If dad and the bank can figure out how to pay down the principal that would work best for everyone.  The bank doesn't want the houses I am sure.  Perhaps an extension of the maturity and a forbear of the interest.  So essentially, if the property's income is north of $20k annually, he would need a zero interest setup to pay the principal down for a year.  The key there is the bank would rather get its principal back than write it off.  

It's not clear what the $20k demand really does to the whole picture without real details of numbers and balances, etc.  Did the bank actually offer to refinance with a $20k payment or are we assuming they will refinance if that payment is made?  What would the loan to value be against the property with the $20k payment?  

There is some other ideas that could relate to his additional property and equity but those are probably toward the bottom of the strategy list.  

If you can share some details better like value of the property, gross income, current loan terms that would be helpful in giving you an actual example of a workout strategy.  If not, then run the general idea above at dad and see if he want's to pitch it to the bank.  Chances are the bank is committee reviewing the loan and is exploring some workout strategies on their own.   The down side is they may really want to divest this loan and they are not obligated to create a workout.  The loan is matured and your dad owes the money. Taking the deeds to the properties would probably mean letting your dad off the hook for any deficiency and I am not so sure they would do that, certainly not at this juncture yet.

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  • Lisa Kohl
    REI Pro · Boise, ID · Member since 2014 · 380 posts · 93 votes
    10y

    @Stephen Williams Commercial loans aren't my expertise but hopefully others will chime in.

    0Reply
  • Ben Moores
    Investor · Houston, TX · Member since 2015 · 10 posts · 6 votes
    10y

    I suspect others with far greater experience than I will chime in but I think your fathers situation is certainly salvageable.  I wish you both all the best. 

    0Reply
  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    10y

    Might need a little more information to get specific but it sounds like dad has an interest only loan on section 8 housing.  We are at maturity and it doesn't sound like he really earned any equity through payments.  So that is a poor loan structure on both the bank and your dad's behalf.  

    The good news is the property cash flows so it could support debt service but from the post we don't know how much cash is really available.  I suppose one of the issues dad may have with giving more cash flow to the bank is he loses his desire to own the property if he has no cash from it.  Might just have to suck it up and stick around to make things better or risk the bank going after him for a deficiency judgement.

    If dad and the bank can figure out how to pay down the principal that would work best for everyone.  The bank doesn't want the houses I am sure.  Perhaps an extension of the maturity and a forbear of the interest.  So essentially, if the property's income is north of $20k annually, he would need a zero interest setup to pay the principal down for a year.  The key there is the bank would rather get its principal back than write it off.  

    It's not clear what the $20k demand really does to the whole picture without real details of numbers and balances, etc.  Did the bank actually offer to refinance with a $20k payment or are we assuming they will refinance if that payment is made?  What would the loan to value be against the property with the $20k payment?  

    There is some other ideas that could relate to his additional property and equity but those are probably toward the bottom of the strategy list.  

    If you can share some details better like value of the property, gross income, current loan terms that would be helpful in giving you an actual example of a workout strategy.  If not, then run the general idea above at dad and see if he want's to pitch it to the bank.  Chances are the bank is committee reviewing the loan and is exploring some workout strategies on their own.   The down side is they may really want to divest this loan and they are not obligated to create a workout.  The loan is matured and your dad owes the money. Taking the deeds to the properties would probably mean letting your dad off the hook for any deficiency and I am not so sure they would do that, certainly not at this juncture yet.

    2Reply
  • Drew Perkins
    Real Estate Agent · Louisville, KY · Member since 2015 · 33 posts · 24 votes
    10y

    The bank is probably not going to leave him hung out to dry.  They are in this together with him and don't want the assets back themselves.  I'm a former banker and have seen this a bunch.  They will do a couple of things:

    1.  Renew the loan but seek additional collateral.  If there is another piece of property with some equity you might propose that (primary residence or investment property).

    2. Renew the loan but really get aggressive with the amortization (shorten the loan to get to a respectable LTV quickly)---this would hurt of kill any prospective cashflow.

    3.  Stick to their original feedback.  If this is the case and he doesn't have the funds then see if it can be renewed for 90-120 days so that you can shop the loan around to other lenders to seek a different solution.  

    2Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Your father as he had aged should have moved most of his wealth to untouchable equity and liquidity assets.A proper estate planner would have helped with this. It is what it is now which is a big mess.

    I generally do not like banks as they want your first born. If you are putting down say 25% on something but getting non-recourse it's not that big of a deal with other investments paying off. If a bank wants to encumber everything then the property someone buys better be a grand slam to put the whole portfolio at risk. With banks you have to get tough with them. Only tell them you will encumber select properties and once LTV drops the cross collateralization goes away along with the recourse. You have to find a bank in growth mode that is hungry to make investments in your asset class so you can negotiate closer to the terms you want.

    The banks in past years weren't healthy in the last downturn and now that they have made new stricter underwriting loans they are looking to move the crud off the books.

    Your dad could tell the banker " Thanks and I appreciate you reaching out to me concerning this loan. I don't have 20,000. What other options do you have available that can be offered to resolve this issue?"

    Of course the first solution by a bank is "Give me more money" as that is what they are programmed to do in what benefits them the most first.

    I never do interest only on properties to make debt service work. That is a sure sign someone is overpaying for a property unless it is a value add type deal with no pre-pay penalty. Those deals you want the lowest monthly payment and do not care about principal pay down as in one to two years you are refinancing at a higher value into a regular loan.

    No legal advice given.

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    2Reply
  • Robbie J.
    Investor · Sugar Land, TX · Member since 2014 · 18 posts · 5 votes
    10y
    Why can't the bank restructure the loan, release one of the properties to be sold and use that to pay the balance?
    0Reply
  • Stephen Haynes
    Rocklin, CA · Member since 2015 · 207 posts · 66 votes
    10y

    Pull a loan on the paid off property.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Stephen Williams:

    These mortgages were packaged in one commercial loan in the amount of around 200,000. These aren't great properties and he uses them to pocket the difference of the mortgage payment versus the amount he gets in section 8 for the property every month. ....

    So now the trouble. He gets a call today from his lender telling him he had been reviewing the loan and found that he was realistically under water a total of about $40,000 value wise from what the actual loan was. The loan has matured and the only possibility of keeping it is a $20,000 balloon payment that he could never come up with. He asked the man, "So can I just give you the houses?", the man said well we're not really at that point yet, this is more of a notification that it is a bad loan. 

    >>> Solution is called a Deed in Liue <<<

    The houses were mercilessly over-appraised. The bank never reviewed the appraisals and signed off on them. Thus he finds himself in a bad loan, with houses nobody really wants, and a loan that no other bank would want to touch.

    The only nest-egg my dad has from all this is about $50,000 in equity from all properties combined. None are purchased under an LLC, they're all personal loans.

    >>> HUH?  If he's upside down, there is NO EQUITY <<

    The man has immaculate credit and has never missed a payment on anything in his life. So all that being said, I hope it makes sense what's going on. My questions are these.

    1. Is there any way for him to get out of this predicament without them seizing everything he owns and potentially all of his accrued equity with it (including his own house which is paid off) ?

    >> Deed in Liue surrenders the properties secured by the mortgage in question.  So if his personal home is free and clear, then your concern is only the question, is the mortgage a recourse or non-recourse loan?

    2. What would be the best starting point and course of action for him to take?

    3. Have you or someone you know gone through something like this and what did you/they do?

    4. What's going to happen to him from a bank action stand point?

    I would really appreciate any advice you have. I'm not a real estate guy; my dad is just my best friend and I'd do anything to help him. Thank you so much for reading.

    0Reply
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