Real Estate Pickle

[Niko]

You'll have to ask around. Any real estate investment groups in the area? Any apartment associations? Attend a couple of meetings and network there to hit them up for references. Also consider asking at Discussion Board, they are a really [FONT=&quot]knowledgeable [/FONT]group with lots of land lording experience. Ask for a reference in the state your interested in.

Thanks Hp. I'll check that website and ask around town. I do know a couple of realtors -- they'd probably have an idea.

 

[socca]

If I were in your shoes, I'd call both your lenders, carefully explain your situation, and ask for advice. I doubt that your story will be the first of its kind that they've heard. If they are smart, they will be looking for an equitable partial-lose/partial-lose arrangement rather than a win/lose or lose/win arrangement. I may be a tad idealistic, however. Good luck with this!

 

[Niko]

If I were in your shoes, I'd call both your lenders, carefully explain your situation, and ask for advice. I doubt that your story will be the first of its kind that they've heard. If they are smart, they will be looking for an equitable partial-lose/partial-lose arrangement rather than a win/lose or lose/win arrangement. I may be a tad idealistic, however. Good luck with this!

In theory that is how it should work. But my experience has been to the contrary.

Even though I have two trust deeds, both are held by the same lender (but, unfortunately, have different investors). I've called my lender. The loss mit departments at most major institutions are overwhelmed right now with these types of calls. I haven't found a way to speak with any "decision makers." I can only speak with employees who basically have a script to read. That script says there's nothing they can do until I've tried selling my house for a while and am at risk of losing my home. Since I haven't listed my house and am current on my payments, they won't give me the time of day.

 

[Bestwifeever]

If I were you I would rent it out and eat the shortage of rent to mortgage payments until your wife is working--you say the move will result in better pay, and you can apply some of the better pay to the house payment shortage.

Then I would save every penny your wife earns once she starts working, until you have an amount equal to the shortfall in the sale price, and then I would sell the house for whatever you can get for it. Personally I would not expect a lender to make a deal with me--I have a feeling that those deals could follow you for a long time, in your credit report, etc.

Your house is just another investment that you have had the misfortune to lose money on. You wouldn't be giving the lenders extra money if you sold for a profit, so why should they absorb any loss? (Note these are generic questions not directed at you personally.)

 

[Niko]

You wouldn't be giving the lenders extra money if you sold for a profit, so why should they absorb any loss? (Note these are generic questions not directed at you personally.)

I tend to agree, which is why I am leaning toward what you suggest. Perhaps I'm a bit old-fashioned, but I also believe that one should honor deals made at arm's length, especially if one has the means.

 

[OAG]

How much do management companies typically charge? Is it a percentage of rent, or a flat fee? Why would there by a 60 day down time?

I actually think our finances could muster a 60 day down time. We have $5-6,000 saved now and could have $8-10,000 by YE. Moreover, I (already!) get a raise (7-9%) at my new job effective Jan 1. For a number of reasons that aren't relevant here, we should get a $4-5,000 tax refund in Feb/March. Finally, when my wife resumes working in August, we should have a net increase of $2,500-2,800/mo.

Usually the rate is something like 7-10% of the monthly rent (depends on services provided to some extent). Additionally, some percent of the initial monthly rental charges (maybe like 50% on a 1 year lease up to 100% on a 3 years lease). I said 60 days as a general "rule of thumb" as a time between tenants (cleanup, painting needed repairs, etc., and the major one is the rental market in whatever area; some are slower and some rent up quicker). It varies and can be reduced somewhat if there is a "showing clause" in your lease whereby the property can be shown to prospective new tenants while the old tenants are still there (usually within 60 days of the lease expiration) if they do not intend to renew. Most tenants and RE people are not going to like that clause - for obvious reasons (possible liability and/or loss of property through theft).

I did not see all the responses you got and just responded to you question first. Looks like you may have the situation under control now. Good luck on the new job.

 

[simple girl]

Thanks for your input, SG. I'm inclined to try managing myself. I know a handy man in the area. He does his own work on 8 or so rentals he owns. I suspect I could talk him in to covering mine too for a reasonable price. How does one go about picking a "good" management company? Having gone to college in this town, I know of most of the management companies, but I have no clue which are best from a LL's point of view.

As someone else mentioned, I would ask around for opinions from the local community, if you can get them. I think it is really tough to know ahead of time how good your mngmt company will be. Ours does a decent job, but it's not stellar. They took a LONG time to fill the unit the last time. They have had repairs done without contacting us first - we just get a bill (we question the costs/charges). They have taken forever to fix accounting errors, and we have to pester them to get resolution. When we ask for something to be done at the property (like an inspection), it seems to take forever to get it scheduled and completed.

We couldn't find a regular realtor or handyman to show the property and manage it for us, otherwise we would have gone that route. I'd say if you trust the handyman you have in mind, you may be better off than going with a big mngmt company where you may be one of many clients. Plus, you are a RE attorney, so you can write up your own leases, etc. Sounds ideal to me!

P.S. Don't forget to change your homeowner's insurance to a landlord's policy, plus, if you don't have one, you may want to get an umbrella policy, too, for the extra liability protection.

 

[Martha]

I have offered a deed in lieu, but they won't consider it until I've had it on the market for a long time and I'm in default. Even if I market the property and am in default, the DIL is problematic with two trust deeds. My fear trying settle up with #2 is that the will not settle for peanuts once they see my earning potential. They may take their chances in court knowing that I am not judgment proof.

Talk to a bankruptcy lawyer. In the past, I have successfully done this even when there are two mortgages/trust deeds on the property.

 

[tryan]

Problems is "any" sale - short or conventional - will take MONTHS. I just pulled one off the market after holding it vacant for a YEAR ... yikes! At $1600/month and the house will need to be vacant (add in utility costs) to be sold ... this is not a pretty option. Rent it out, eat the negative cash flow until the market improves. Probably better to bleed slowly in this situation.

Try renting with the option to buy ... you should be able to cut the negative cashflow about in half (by crediting it to a down payment).

That's my 2 cents.

 

[Texican]

Options

Take your time and think it thru carefully. Remember that if you plan to buy a house in your new location you might have to be in really good financial condition to qualify for a new mortgage. I dont think it will be as easy to get into a new house. Getting into a house over the last few years has been very easy by comparison.

With gas prices coming down so much you might consider a two hour commute for a short time until things settle down. Your family might be able to ease the commute if feasible so as not to make it daily one.

Renting looks like it might be your best option. With the economy in turmoil renters might be easier to come by at least until you can get out of this house. There are many advantages to renting real estate. You can write off a lot of stuff. Find a tax guy to help you out. You may be able to offset some of your new salary increase or at least the tax burden with the rental.

You want to sit down and talk to your wife about delaying school just until the house is sold. Another income may help you get out of it faster.

You have a lot of options and decisions to make. Just take your time and think it thru carefully. You dont need to end up with more debt. That basically negates your raise...

 

[ChrisC]

Seems like you can finance the negative cash flow from current savings and the security deposit you might take for a rental, for at least a year, easily. I'd check with an accountant to determine how much in tax savings you might get from depreciating and taking a loss on the rental unit, if possible. It could be that if the negative cash flow is tax-affected, you're actual "loss" is not that great for this year. If the rental market could bear future increases for your property, you might be able to hold on to it for a while, without badly twisting in the wind.

 

[Niko]

Update

I thought I'd update the group, nearly 2 years later, on how all of this played.

My wife and I decided to rent out our place for a while to see what the market did. We found renters who paid $1045 (near the upped end of my estimate) per month. They were good renters who stayed there from December 08 until April 09, when they decided to leave early. We negotiated an "early termination" fee that, frankly, both of us were happy with. They were happy because they wanted to buy another house, and I was happy because I wanted to sell the house that summer and the early fee let me put the house on the market before the summer rush while still covering my mortgage a while longer.

House hit the market, I believe, in late May 09. Had an accepted offer by mid June. Closed around mid July 09. All things considered, we got lucky with the sale process.

In the end, we had to bring $30k to the table to pay off the loans. Rather than walk away or seek a deed in lieu, as I proposed earlier, we paid it all. About 40% came from our emergency fund, 35% from my Roth IRA (penalty free distribution of prior contributions), and 25% from a 0% credit card offer, which I have since paid off. This hurt, but in retrospect I'm glad I chose this route rather than trying to walk away or pay less than I owed.

The whole experienced soured me greatly on real estate ownership, though I shoulder the blame on this one for financing 100% in 2006, at the height of the bubble. Lesson learned. If that's the most expensive lesson I learn in my life, then it's all down hill from here!

 

[stephenandrew]

I thought I'd update the group, nearly 2 years later, on how all of this played.

My wife and I decided to rent out our place for a while to see what the market did. We found renters who paid $1045 (near the upped end of my estimate) per month. They were good renters who stayed there from December 08 until April 09, when they decided to leave early. We negotiated an "early termination" fee that, frankly, both of us were happy with. They were happy because they wanted to buy another house, and I was happy because I wanted to sell the house that summer and the early fee let me put the house on the market before the summer rush while still covering my mortgage a while longer.

House hit the market, I believe, in late May 09. Had an accepted offer by mid June. Closed around mid July 09. All things considered, we got lucky with the sale process.

In the end, we had to bring $30k to the table to pay off the loans. Rather than walk away or seek a deed in lieu, as I proposed earlier, we paid it all. About 40% came from our emergency fund, 35% from my Roth IRA (penalty free distribution of prior contributions), and 25% from a 0% credit card offer, which I have since paid off. This hurt, but in retrospect I'm glad I chose this route rather than trying to walk away or pay less than I owed.

The whole experienced soured me greatly on real estate ownership, though I shoulder the blame on this one for financing 100% in 2006, at the height of the bubble. Lesson learned. If that's the most expensive lesson I learn in my life, then it's all down hill from here!

For what it is worth, it sounds like you guys are people of integrity. Congratulations on getting out of this situation. I think what goes around, comes around---you are due for better things next time you venture into the RE market.

 

[tryan]

What's nice is: with your credit intact, you can buy back in at a much lower price in a better city and re-coop to loss when things improve.

A short sale or walking away would have left you on the sidelines for a long time.

 

[73ss454]

With all the people I know ripping off the banks with phony claims on real estate it's good to see you stand up and do the right thing. If the worst thing that happens in life is a loss of 30K on a real estate deal then Life is Good!

 

[Tesaje]

Considering I've lost $30k in the stockmarket, its good to see someone pay the debt & rise again intact with good credit. Bravo.

 

[Meadbh]

Good for you Niko, and thank you for the update. It's good to know that there are honest people out there who do not walk away from their responsibilities just because they can. $30K is not a huge loss in the grand scheme of things and I'm sure it has been a lesson well learnt.

 

[Moemg]

Good for you for doing the right thing . I see too many people walking away and not learning a thing.

 

[TromboneAl]

Thanks for the update. All you lost was some dough, which based on your earning ability, integrity, and good decision making skills you should have no trouble replacing.

 

[Pete]

I am mostly looking for advice on the practical side of things. Eg, what are the pros and cons of renting the property out in this situation? I've never been a landlord, so I'm curious to hear from other LLs who have been in a similar boat.

I was a loandlord for 25 years and hated it. Late rent, bad checks, damage, sub leasing, floods..... and as your finding out-a very illiquid investment. You gotta have the stomach for it. I didn't, and my rentals were local.

Makes for a great write off, but you have to recoup all the depreciation in the end and have a huge tax bill in one year. Why lose 300 dollars a month to get 100 back in taxes. That recipe sounded good when properties were going up. That money you're gonna lose every month would look better in your 401k. If you still like real estate as an investment do it in a REIT where you can sell with the press of a button.

You have to do what is best economically, but cutting the cord will bring the greatest psychological relief....if it's possible.

My feeling is real estate has more to fall and I would live the new American dream of RENTING after you relocate. If nothing else it will give you time to size up the local markets.

*All this from someone who lives in SoCal. Results may differ in your area.

 

[Texas Proud]

As someone else mentioned.... don't get sour on RE... it IS a down market... I bought our new house (new to us) at about $15K less than 'market'.. but had to sell my old house at about $15K less than market... so it was a wash IMO... but, I got a lot better house that will appreciate faster than the old one...

To me... a win...

 

[HpRyder]

[FONT=&quot]It’s great you got out with a small loss. You’ve had a taste of both sides of the fence, being a landlord and an owner. I much prefer being the landlord, even though it comes with headaches. I don’t find them so bad. [/FONT]

 

[Bestwifeever]

Thanks for the update. You've had peace of mind for the year since you sold the house--losing the $$ I'm sure was painful, but you aren't losing sleep over it still being a burden to you.

 

[NW-Bound]

I'll second what earlier posters wrote about your loss being not the end of the world, although it hurt you quite a bit, particularly as you are still young and in the late 20s. But you will recover and will be fine.

If it is of any consolation, look at what is happening to my neighbor who is down the street from me. Having been in my house for 22 years, I am among the people who have been in this neighborhood the longest. My guess is about half of my neighbors are at least 50 year old, and empty nesters. We are happy where we are, hence do not care that much about the home price increase during the housing mania.

Indeed, there were very few houses in my neighborhood being changed hand during the last bubble. One of these rare transactions was the house I mentioned earlier. In 7/2005, public records show that this house changed hand at a price of greater than $500K. In the chart from Zillow as shown below, that transaction is marked with a $ sign. Look how the price estimate from Zillow continued to rise up after that, and then the dramatic decline from the top. At this point, the price has decreased by $200K from where my neighbor paid.

When the house was put on the market in 2005, all people in the neighborhood noticed and followed it. Remember that this is and has been a stable neighborhood with relatively little RE action. When the house got sold in a matter of weeks at a record price, we all shook our head in amazement.

Alas, last month, we saw a for-sale sign in the house front yard. It must be pretty sad for the homeowners, whom I still have not met. That house was the last bought in the neighborhood, and now is the first on the market.

As for me, my house, which is of a different floor plan but comparable in size, was paid off and is likely the place where I will die. So, how do I care about what Zillow says, except to satisfy my curiosity?

 

[Westernskies]

I thought I'd update the group, nearly 2 years later, on how all of this played.

My wife and I decided to rent out our place for a while to see what the market did. We found renters who paid $1045 (near the upped end of my estimate) per month. They were good renters who stayed there from December 08 until April 09, when they decided to leave early. We negotiated an "early termination" fee that, frankly, both of us were happy with. They were happy because they wanted to buy another house, and I was happy because I wanted to sell the house that summer and the early fee let me put the house on the market before the summer rush while still covering my mortgage a while longer.

House hit the market, I believe, in late May 09. Had an accepted offer by mid June. Closed around mid July 09. All things considered, we got lucky with the sale process.

In the end, we had to bring $30k to the table to pay off the loans. Rather than walk away or seek a deed in lieu, as I proposed earlier, we paid it all. About 40% came from our emergency fund, 35% from my Roth IRA (penalty free distribution of prior contributions), and 25% from a 0% credit card offer, which I have since paid off. This hurt, but in retrospect I'm glad I chose this route rather than trying to walk away or pay less than I owed.

The whole experienced soured me greatly on real estate ownership, though I shoulder the blame on this one for financing 100% in 2006, at the height of the bubble. Lesson learned. If that's the most expensive lesson I learn in my life, then it's all down hill from here!

Niko, my hat goes off to you for the way you handled this. Thanks for taking responsibility for your situation and not dumping this debt onto the rest of us. It is refreshing to see someone take the high road for a change. Glad this worked out the way it did. All the best to you.