Forclosure or try to sell at a loss??

Question

My husband and I acquired a rental property in 2023 with hard money with the intention of rehabbing the home and renting out the 3 units, refinancing and paying back this short term loan.

Unfortunately the ARV we relied on was significantly off and we have been stuck paying a high interest payment on this loan for months. We’ve tried to sell the property outright with no luck and would only be able to refinance if we put about $80k down.

Basically, we’re at the end of our rope with the place. Thoughts on (1) biting the bullet and starting the foreclosure process versus (2) waiting it out and trying to sell the property (at a loss)? No one putting in offers at our break even selling price.

Note: All units are leased out currently and the total rent is currently equal to the interest payment we’re making so we’re at a break even but obviously can’t do this forever.

Also, the lender won’t take back the property in leu of payment-we asked.

Mark Cruse · Answer

I dont understand why a HML would do a deal with skewed numbers in the first place. Was it your rehab over runs which made the numbers go left. ? For me, If i could come up with the 80k I'd do it, and wait it out for awhile with a decent rate. Putting that much down with a normalized interest rate I assume the cash flow is there. I'd ride that horse for 5 years or so to see where the appreciation and market is. This is the importance of having multiple exit strategies.

Marcus Auerbach · Answer

Good news is its fully rented and generates enough cash to satisfy a 14% HML (give or take), that's pretty robust. If you hold it long enough it will turn green eventually. So, Id say pull yourself up by the bootstraps, go find 80k and get it financed. Thats 80k you are sending on your education, consider it an investment.

Jay Hurst · Answer

@Alyssa Balam  When is your hard money due in full?  Do they have an extension policy?  It is not really in their interest to foreclose either.

Jay Hurst · Answer

I saw your previous post about a year ago as well.  This is NOT to pile on as hindsight is 20/20, but maybe some one else reading this will see this and avoid this same mistake.

A hard money lender who does NOT require a "subject to" appraisal  (which is an appraisal done with your scope of work in hand, and the appraiser gives you the after repair value) is 100% NOT doing you a favor. at all. Sure, it allows you to close that much faster and saves you a little bit up front. But, obviously, this scenario has already cost you a ton.

I have borrowers tell me all the time that "other" lenders do not require an appraisal. Ok, fine, but I am not interested in foreclosing on you or taking your property back. I want to know the numbers but I also want YOU to know the numbers. Get an appraisal from a disinterested party. Sure, it will take a few days but worth its weight in gold.

Jay Hurst · Answer

We do cross collateralized loans all the time. That more or less means being able to combine the equity from multiple properties. So, you might have enough equity in the rest of your portfolio to save this property.

Foreclosure should be the last possible step because it will take away you ability to finance any real estate for several years, even up to 7 years for owner occupied programs with good terms.

Dan H. · Answer

>appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. in My market the refi appraisals are more conservative than appraisals associated with offers.   However, I do not expect the refi appraisal to be 30% low, maybe 10% low.

Did the market price fall or were the comps used by RE agent not good comps.  If they were good comps and the market has not fallen, then those comps could be the basis of an appraisal appeal.  It is very unlikely that the appeal will get the property to a $340k value, but even a $275k valuation would reduce what you need to bring to refinance.

Question is how is the cash flow?   Is it renting for at least $4k?   If not, I question if it is worth keeping.

I will not beat you up when you are down.  I expect you are aware of various mistakes without the need for them to be itemized and will do better next time.

Good luck

Caleb Brown · Answer

I would try to see if you can do a short sell scenario. Other option is try to come up with extra money to refi into a long term loan. Do you have any other funds or property to help offset and get this property behind you?

Daniel Tanasa · Answer

Hello Alyssa,

Sorry to hear about your problem. Can you share the listing with me to take a look at and see if I can think of any other option? How are you trying to sell it? On the MLS with a realtor?

Wale Lawal · Answer

@Alyssa Balam

To avoid foreclosure, consider various strategies such as refinancing options, negotiating loan modifications, creative financing, and exploring foreclosure as a last resort. Portfolio lenders or credit unions may offer flexible refinancing options, while creative financing can improve cash flow. To improve cash flow, consider increasing rents, exploring short-term or mid-term rental options, or leasing units at higher rents.

Good luck!

Forclosure or try to sell at a loss??

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