Underwater rental property. Keep it or short sell it?

General Real Estate Investing
8yFollow

Underwater rental property. Keep it or short sell it?

Chad Rupp
TX · Member since 2017 · 10 posts · 2 votes

I would love your advice. Should I keep this rental property or should I short sell it?

I have a condo in Algonquin Illinois (3 bed, 2 bath, 1890 sq/ft) that I had bought for $265k in 2006. 
I have about 40k in equity in the property

The current comps for this property are around 185k - 195k.
Ten years later the property is still 70k - 80k underwater.
This property used to be be my main residence, but I have moved and I am now renting it.

Total expenses = $1835.84

Rent = $1700.00

I'm losing $135.84/month

With this property still underwater 70k - 80k and I am paying an extra $135.84/month. Would you keep this place or short sell it? Its been ten years since the crash and the location is still creeping back. Im not sure how to run numbers to see when, and IF, I will ever break even on this property. 

Thanks for your advice!!

0Reply
125 views

Most Popular Reply

Cara Lonsdale
Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
8y

Short sales are tricky, people.  It's not an easy answer for an investor to make.  Be sure before you decide to move forward on a short sale.  This will affect your ability to obtain conventional financing for 3-5 years.  You will be limited to hard money or commercial loans to make your future purchases.

In addition, the lender has the ability to go after you for the difference.  Not alot of people realize this, but if you sell for $40K less than the property is worth, be prepared to be sent a bill for the $40K after closing AND be prepared to be sent a tax form to treat the $40K as INCOME on your taxes for the year you sold it (which TOTALLY RUINS YOUR DAY!).

There is usually some protections in place for owner occupieds on a deficiency judgment for forgiveness of the balance, but as far as I know, there is no flexibility for investors who short sale to eliminate that debt after closing.....except bankruptcy....which is WORSE because that stays on your credit for 10 years (even though you can purchase again in as little as 2 years).

Foreclosure would be another way to eliminate the deficiency, but even then, depending on your state, and how they secured the debt, that isn't always a given either.

No great options here.  Best to consult an accountant and/or attorney for your best course of options that work with YOUR future strategy in mind.

5Reply
See this reply in the discussion

29 Replies

Jump to latestLatest
  • Joseph ODonovanPro Member
    Property Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
    8y
    @Chad Rupp I'm a bit confused. You say you have 40k in equity but then you follow up by saying your underwater? What's the principal balance of your mortgage?
    2Reply
  • Leon F.
    Louisville, KY · Member since 2015 · 26 posts · 75 votes
    8y
    it sounds like he bought it for $265k paid it down to $225k ($40k equity?) but it's only worth $180k-$190k?
    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y

    If you paid more for it than it's worth, you have no equity.  If you have not equity, and have negative cash flow, you have no reason to keep it...and every reason to dump it...ASAP.

    This is obvious.  You are in the hole in every possible way, and not only are you digging a deeper hole, but you're covering yourself up with the dirt.  Get out of the property before it's too late.

    Move forward...not backward.

    1Reply
  • Chad Rupp
    OP
    TX · Member since 2017 · 10 posts · 2 votes
    8y

    @Joseph ODonovan, my apologies I do not have equity in the house because it is underwater. @Leon F. is correct  I have paid it down by 40K but its only worth 180k - 190k.

    0Reply
  • Jennifer Delmore
    Rental Property Investor · Littleton, CO · Member since 2017 · 61 posts · 18 votes
    8y

    In your case I'd probably short sell it ASAP.  We have a 3BR, 2 BA near Cleveland that we bought in 2004  and are still 30-40K upside down, but our tenant pays the mortgage, and property management fees (we moved out of state) and utilities and we clear ~$100/month, so we hang on to it and let our tenant pay down the mortgage.  If we were losing cash every month I don't think we'd still have it.

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    So if you sell you’d need to bring around 40k to the table? Not sure how that a good idea.
    1Reply
  • Jennifer Delmore
    Rental Property Investor · Littleton, CO · Member since 2017 · 61 posts · 18 votes
    8y
    Originally posted by @Caleb Heimsoth:

    So if you sell you’d need to bring around 40k to the table? Not sure how that a good idea.

    I assumed a short sale. 

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y

    @Jennifer Delmore doesn’t that negatively affect your credit ?

    0Reply
  • Jennifer Delmore
    Rental Property Investor · Littleton, CO · Member since 2017 · 61 posts · 18 votes
    8y
    Originally posted by @Caleb Heimsoth:

    @Jennifer Delmore doesn’t that negatively affect your credit ?

    It would definitely affect your credit, but the title of the thread is keep or short sell :).  

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y

    Definitely sell then.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Caleb Heimsoth:

    So if you sell you’d need to bring around 40k to the table? Not sure how that a good idea.

     Slow bleed vs. moving forward.  Treat this like a Bankruptcy of sorts, applied to one property. 

    1Reply
  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    8y

    You've held on for quite some time. My opinion is if you are still underwater in 2018 then you need to either be prepared to be under for many years to come potentially or cut your losses. It's a personal decision on if you believe in the property long term and if weathering the storm is or is not tolerable for you financially. 

    1Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    Short sales are tricky, people.  It's not an easy answer for an investor to make.  Be sure before you decide to move forward on a short sale.  This will affect your ability to obtain conventional financing for 3-5 years.  You will be limited to hard money or commercial loans to make your future purchases.

    In addition, the lender has the ability to go after you for the difference.  Not alot of people realize this, but if you sell for $40K less than the property is worth, be prepared to be sent a bill for the $40K after closing AND be prepared to be sent a tax form to treat the $40K as INCOME on your taxes for the year you sold it (which TOTALLY RUINS YOUR DAY!).

    There is usually some protections in place for owner occupieds on a deficiency judgment for forgiveness of the balance, but as far as I know, there is no flexibility for investors who short sale to eliminate that debt after closing.....except bankruptcy....which is WORSE because that stays on your credit for 10 years (even though you can purchase again in as little as 2 years).

    Foreclosure would be another way to eliminate the deficiency, but even then, depending on your state, and how they secured the debt, that isn't always a given either.

    No great options here.  Best to consult an accountant and/or attorney for your best course of options that work with YOUR future strategy in mind.

    5Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Brett Goldsmith:

    You've held on for quite some time. My opinion is if you are still underwater in 2018 then you need to either be prepared to be under for many years to come potentially or cut your losses. It's a personal decision on if you believe in the property long term and if weathering the storm is or is not tolerable for you financially. 

     Keeping in mind that every month the property is held on to, he goes deeper and deeper in the hole.

    Holding out any longer is not investing anymore...it's speculating.

    If you are headed to a particular destination of great interest, in a rowboat, and about 50 yards off shore you realize the boat has a leak and is sinking...fast, you have two choices:

    1 - You can row faster, and bail even faster (wait, no partner in the boat, so you have to choose between those two...I suggest rowing like you've never rowed before).  Now, you quickly realize you are never going to make it to the end without sinking, but you "rationalize" the wind (rent increases) will help, the current (appreciation) will help, or some other future event you have no control over (????) will somehow help you reach your destination (positive income).

    2 - You can step out of the boat (before you get in too deep and can't get out without drowning), walk back to shore, get another rowboat (that doesn't leak), start rowing and recover your previous ground...past the previous...now sinking, rowboat, salute it, and continue successfully onto your destination.

    You can always recover what you lost, as long as you stay in the game. The longer you throw good money after bad, you will just sink like that rowboat...and right out of the picture (REI picture).

    Much like playing Poker, the most important rule to follow, is to "stay in the game".  Staying with a bad hand, much like staying with a bad deal, will take you out the respective games faster than you can say, "where did all my money go?".  Also, much like Poker, no matter how many hands you lose, you haven't lost any of your money yet...it's just in a different pile on the table.  As long as you are still in the game, you can put it back in your pile.

    1Reply
  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    8y

    Disclaimer: In addition to being an investor I also prepare income tax returns. This is not tax advise on your particular return but some things to discuss with your tax professional.

    When you say underwater are you reducing the shortfall by the monthly Principal Payment that increases your equity in the property on a monthly basis? If you are paying $140 a month in principal it is not a shortfall just negative cash flow which is an entirely different thing.

    Short sell warnings!

    1. It will impact your credit.

    2. The mortgage company can and most likely will send you a form 1099 C for cancellation of debt per IRS regulations. The amount of the "INCOME" you will be receiving is the difference between what the mortgage company gets paid and what you owe them. That's right the short sale loss you suffer will be considered INCOME as a forgiven debt by the IRS.

    Did you use the FIRST TIME HOME BUYER CREDIT to buy this Condo? That can be written off on a short sale as long as it is not sold to a relative or other prohibited party. If you are not sure look exam your 2016 income tax return. Check out line 60 B. If it says $500.00 then the answer is yes.

    Since this is no longer your principal residence you have no access to the tax relief that was made available a couple of years ago. After closing costs you could receive a 1099 for over 60 K and owe the tax on that in the tax year sold. Is your tax situation strong enough to offset this income?

    As a balance to the 1099 C you may be able to write off any capital loss in excess of your depreciated basis on the sale.

    Other Options:

    1. Raise the rent to cover the shortfall until appreciate is in your favor again? 

    2. Refinance

    3. Negotiate interest and reduced principal for a short time. Many banks will take interest only. Try to keep making as much principal payment as you can.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Jennifer Delmore:
    Originally posted by @Caleb Heimsoth:

    @Jennifer Delmore doesn’t that negatively affect your credit ?

    It would definitely affect your credit, but the title of the thread is keep or short sell :).  

    YUP and lender will want financials and if they feel they can they will ask for a note for the difference.. you have to be basically broke to get a short sale to go through with no reprocussions.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Amanda G.
    Rental Property Investor · Augusta, GA · Member since 2017 · 825 posts · 278 votes
    8y

    Could you get a rent-to-own person in there to get it to positive cash flow on a sale? You'd still lose money from the original price, but it might be less damaging than a short sale.

    1Reply
  • William B.
    Contractor · PNW · Member since 2017 · 58 posts · 48 votes
    8y
    Originally posted by @Chad Rupp:

    I would love your advice. Should I keep this rental property or should I short sell it?

    I have a condo in Algonquin Illinois (3 bed, 2 bath, 1890 sq/ft) that I had bought for $265k in 2006. 
    I have about 40k in equity in the property

    The current comps for this property are around 185k - 195k.
    Ten years later the property is still 70k - 80k underwater.
    This property used to be be my main residence, but I have moved and I am now renting it.

    Total expenses = $1835.84

    Rent = $1700.00

    I'm losing $135.84/month

    With this property still underwater 70k - 80k and I am paying an extra $135.84/month. Would you keep this place or short sell it? Its been ten years since the crash and the location is still creeping back. Im not sure how to run numbers to see when, and IF, I will ever break even on this property. 

    Thanks for your advice!!

    See if you can legally raffle the property in Illinois, raffle can legally conflict with the state lottery but it would be worth looking into. It isn't a piece of cake to do but I think it may be a viable alternative for you to exit that property if you can do it legally. Strategize the ticket price to reflect favorable odds or enticing odds 1:1000 or 1:2500, I will buy your first ticket :)

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y
    Chad Rupp most likely the bank will only allow you to short sell it if you stop paying on it. Get ready for your credit to take a huge wack. Also if you own another property and it has equity in it and Illinois is a deficiency state the bank could slap a lien on your current property or flat out due you for the deficiency if you have a job. Here is the reality too, you are losing $135 a month but how much is the principal payment a month. While your negative cash flow your lowering the debt. It’s not a good investment property but if it was me I would bite the bullet and keep it vs having my credit take a hit and the chance the lender come after me anyways
    7e investments53 Reviews
    WebsiteView Page
    2Reply
  • BJ Everson
    Property Manager · Columbus, OH · Member since 2017 · 123 posts · 76 votes
    8y

    What is your current rate? If you still have the loan from 2006 I would imagine its higher than current rates. If you have a big enough chunk to pay down some of the loan and refi at a lower rate and balance you could potentially get the rental to cash flow positive. I would go to the bank you currently have the mortgage and ask them your refi options. If you are considering selling short that will hurt them and they should be willing to help you with a refi. And Refi's with the same bank usually dont require an Appraisal unless you are trying to cash out as well. 

    Look to see what your mortgage payment would be at current balance and current interest rates and see if youd cash flow. 

    All of what I said is solely based on you knowing/believing that the location still recovering and will get better.  

    1Reply
  • Chad Rupp
    OP
    TX · Member since 2017 · 10 posts · 2 votes
    8y

    Wow, thank you guys for all of your advice and help!!!! Seriously extremely helpful! I am going to reply to each one of you and provide more info on the questions you have. Also, below are the exact details of the loans and its history.


    Details --------

    Initial Purchase Price = $265K

    1st loan = $177,830.00 @ 4.125%

    2nd loan = $33,380.00 @ 5%

    Current comps in area =  $185k - $195k

    Total Monthly Costs = $1803.84

    Current Rent = $1700.00

    No money saved up to cover Cap Ex nor smaller repairs

    History --------

    2006

    • Purchased for 265K
    • Two loans: 1st for 235k @ 6.5%, 2nd for 30k @ 8.5%

    2013

    • Refinanced the first loan using HARP brought the rate down to 4.125%

    2014

    • Tried to short sell property due to a hardship (lost a job)
    • Short Sale got denied, but the second loan lowered rate to 5%
    • Credit took a hit

    2015 

    • Started renting property 
    0Reply
  • Chad Rupp
    OP
    TX · Member since 2017 · 10 posts · 2 votes
    8y

    @BJ Everson current rate is at 4.125 for the first loan and 5 for the second.

    0Reply
  • Dan Johnson
    Rental Property Investor · Hot Springs, AR · Member since 2017 · 37 posts · 23 votes
    7y

    How about finding a tenant/buyer to lease option it to? Try to get a $20-25k down payment with a sale option price of $195k to the tenant/buyer. You currently owe $210k ($177k first loan plus $33k second loan). Take the $20k down payment and apply it to one of the loans so that now you owe $190k. And if the tenant/buyer exercises their option to buy then you will profit $5k ($195k sale price - $190k owed on the loans).

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Dan Johnson:

    How about finding a tenant/buyer to lease option it to? Try to get a $20-25k down payment with a sale option price of $195k to the tenant/buyer. You currently owe $210k ($177k first loan plus $33k second loan). Take the $20k down payment and apply it to one of the loans so that now you owe $190k. And if the tenant/buyer exercises their option to buy then you will profit $5k ($195k sale price - $190k owed on the loans).

     Do it this way, and you can expect a visit from a lawyer in the near/distant future.

    0Reply
  • Jim Armitage
    Rental Property Investor · MA · Member since 2019 · 8 posts · 6 votes
    7y

    @Chad Rupp, have you found any solution to your situation?  I'm very interested as I am in a similar situation and have never found a viable solution (for me) other than holding on and hoping the value comes back eventually.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free