Part IV: After Crash, What to Do with My Rentals Now? It’s OK to Walk Away

November 12th, 2009

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Biggest real estate crash in decades – What to Do With My Investments Now? – PART IV – Ways to Dump Your Property Without Ruining Your Credit

After careful evaluation, you may decide to unload your property. As previously mentioned, the goal of unloading your investment properties is to minimize the impact on your financial and credit history. Once the decision is made, you have a few choices that are listed below.

Choice 1: Put It On the Market

You can choose to sell properties on the market directly if its current market value is equal to or greater than your loan amount. It’s not recommended to sell directly on the market when the value is below the loan amount, even if you have extra cash to bring to the table during the transaction. You can save the money by negotiating a short sale and a release of a deficiency judgment with your bank. More details below.

Remember to take into account the typical 6% real estate agent fees paid by the seller in most states. It may be possible to negotiate lower agent fees; however it’s difficult to bring this below 4% unless you use a do-it-yourself agency.

The sale could take anywhere between three to twelve months because there are so many homes on the market, few qualified buyers, and scarce financing. The time it takes depends on how aggressive your listing price is and if you are willing to accept lower offers. It is possible to have tenants in the property during the period; however you may have to reduce rent to compensate for the inconveniences of having perspective buyers coming to the house, and the unpredictable move-out schedule.

Don’t forget to evaluate your tax liability with a tax accountant before you hire a real estate agent. All property depreciation you took has to be recaptured, which will increase your capitol gain or reduce you capitol loss. You will probably owe taxes if you have profits from the sale.

Choice 2: Traditional or Short-Term Lease to Own

Traditional lease to own sets terms at 6 month or 1 year and fixes a sale price when the lease is signed. It could be a more effective method to sell in the short term than selling it outright on the current market. It locks in a buyer first and gives them time to come up with down payment and fix glitches in their credits to obtain financing. This method can work well when qualified buyers are hard to come by.

You should use an experienced real estate agent who knows when to use Lease To Own and had successful transactions before. The entire process should be formalized and well documented to protect your interests.

Choice 3: Short Sale

A short sale is a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan. Short sales are a way for homeowners to avoid foreclosure on their homes and still be able to pay off their loan by settling with lender. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the current debtor.

For real estate investors, proceeding with a short sales is not necessarily contingent on your inability to pay mortgage. Rather, it can be calculated financial move when it no longer makes sense to keep paying the mortgage. This is particularly true when your cash flow is negative and it’s unlikely the property value will recover.

One requirement to sell short is that you must owe the bank more than the property’s current market value. However, it’s not required that you be behind in mortgage payment to initiate a successful short sale. Short sales can prevent foreclosure, which would have a severe impact on your credit history.

If your payments has never been more than 30 days late, and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. If your payments are in arrears, yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

Taxation and deficiency (the amount of the loan that isn’t covered by the sale proceeds) judgment are two major concerns before proceeding with short sale. A principle residence is exempt from mortgage debt relief until the end of 2012 on a federal level; however this does not apply to rental properties. There are certain exemptions for investors if you qualify. Unlike homeowners who are protected under state law prohibiting deficiency judgment, investors do have to specifically negotiate with the lender to release a deficiency judgment. In the current market though, many lenders automatically include deficiency judgment provision in the short sale approval letter. You can see more discussion in Quickest Way to Get Short Sale Done, and related posts under Short Sale category.

Choice 4: Deed in Lieu of foreclosure

Deed in lieu of foreclosure is a process in which you give away your property to the lender because you just can’t pay any more. The lender then sells off the property in order to retrieve a part or whole of the loan balance you owe. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency that remains after the house is sold, especially for investors who are not protected under state law.

A deed in lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. In addition, unlike in the short sale situation, you do not necessarily have to take responsibility for selling your house (you may end up simply handing over title and then letting the lender sell the house).

You probably cannot get a deed in lieu if you have second or third mortgages, home equity loans, or tax liens against your property. Typically your lender will require that your home has been listed with a real estate agent for at least 30 days. Some lenders may also require that the property be vacant, an interior appraisal of the property, and a minimum of 60 days prior to a foreclosure sale.

Choice 5: Foreclosure

Foreclosure is the worst of these options. Your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years. Steer away from foreclosure if you can.

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