My Brother-In-Law bought a condo in Sacramento about 6 years ago when the home prices there were still very high. He initially had a good investment going for him, but now things have radically changed. He owes $105,000 on the condo still. He has a $250 loss every month. They are going to raise the rent slightly in October, but still a big loss. There are nearly a dozen of these condos in the area in foreclosure, most of them selling for $20-$30K. What should they do? They are thinking about just letting it go to foreclosure. They are not big-time investors. They have new cars and a nice house, so don't really need credit that much. I told her the value of that property would eventually come back up, but who knows when? I would hesitate to take that kind of hit on my credit, but their situation is different since they don't plan on buying for a while. Any thoughts?

Shortsale or principal balance reduction. It's no one fault that housing value dropped many lender's are allowing shortsale's or principal balance reduction. While some lenders are more friendly than others it does happen. [SOLICITATION REMOVED]

@Dawn The amount currently owed is $112,000. If the BIL sells today (I will be generous) let's say he gets $50,000. That means the BIL is $62,000 underwater. How many years of house price appreciation will it take for the value of the condo to get back above water? At what rate of appreciation? Is that rate realistic or are these condo's values stagnant or are they still falling? ADD to that underwater problem is the fact that renting this condo out, the owner loses $3,000 per year. Those losses must be factored in to the equation as well. And that means that the appreciation rate must be even greater for this rental property, at its current rents and current expenses to be a worthwhile investment. Yes, there are tax considerations that I neglected to include. With a property this far underwater and still sinking, I don't think I need to include taxes to reach my conclusion. The question the OP asked was what the owner could/should do. In my view, without further details which probably won't affect my conclusion, the answer seems clear. Sell or walk. Take the lumps. This was a terrible investment at $160,000.

Upside down in rental, what to do?

Kevin Yeats

Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes

15y

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.

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Joshua D.Pro Member

BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes

15y

Great analysis, Kevin. I'd also take my lumps and walk. I've been in that very position and had to unload, despite heavy losses, to prevent even greater losses each and every month.

Good luck Adam, and please let us know what your bro-in law ultimately decides to do.

Upside down in rental, what to do?

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