In foreclosure soon

[cgeidl]

We are retirees of 10 years and bought several rental investment properties in Arizona. One we put down 20% is now worth about 50% of the original price we paid and $75000 less then the loan amount. The bank will not take a deed in lieu of foreclosure so we are thinking of letting them foreclose. Our credit will go way down for several years but we do not know how low. We have always been in the high 700's and are wondering if this would change our present credit card limits we have had for years.
We are not needing to ever get any more loans so for us it is better than using up our retirement funds to pay for the foreclosure. ANy other tuggers in the foreclosure situation??Pros and cons???

 

[Icarus]

You can't afford to pay the mortgage on the property or you just want to walk away from your debts because your investment lost value?

-David

 

[ricoba]

I am with David, I don't quite understand your dilemma.

You say you bought several properties, but you are only talking about one in which you are "upside down".

If your loss is currently only a paper loss, why not simply keep renting the homes out that produce income and wait for the market to hopefully re-adjust, so you are not in so deep?

Either way, it must be stressful, but I am sure there is a better solution than just walking away and ruining a lifetime of good credit. Good luck.

 

[pcgirl54]

Are the properties owned individually or in an LLC? In other words how are they titled and financed?

 

[isisdave]

I don't know about Arizona specifically, but because the property is not your residence, foreclosure may not relieve you of your liability for the loan. In other words, you might lose the property, and the lender might be able to sue you for the deficit.

You need a lawyer.

 

[Fern Modena]

Since you own other property (your residence, for one) which is either paid up or current, I'd think it would be very doubtful that your lender would "let you off the hook" in a foreclosure. I'm guessing this because they wouldn't allow you to deed back in lieu of foreclosure. If they do foreclose and then sell your house short, they will most likely expect you to make up the difference between the short sale and the loan balance.

In the end, the least to look forward to is that you'll have to make up the difference, no longer own the property, and have a thrashed credit score. And if you don't have enough money to make up the deficiency, they could put a lein on your residence or sue you.

You tried to play the speculation market, and lost. You signed the loans, you're responsible, even if you didn't think of the possibility of this happening.

Fern

 

[JEFF H]

We are retirees of 10 years and bought several rental investment properties in Arizona.

If you purchased for rental investment I would expect you had it worked out so the rental income provided a positive cash flow.
Are you now having trouble renting the property?
If its renting why not continue with your original plan and wait for the market to rebound befor selling.

You should investigate your options carefully. New programs are likely to be coming soon that help people who are upside down on mortages and maybe one of these will benefit you.

 

[cgeidl]

Thank you for all the comments

The property is in an LLC.Originally three years ago it broke even.We have an eviction of tenant in the property which we may go to foreclosure.
We have always paid all our bills on time but can not afford the negative cash flow which may persist. We are tired of most of our tenants and planned to be out of all rentals by 70.We have the other two homes up for sale and will lose a bit of our down payments but the bank will be paid off.
We do not plan on obtaining any new loans or getting any new credit cards so we do not think the negative credit report will effect us with our existing cards we have had for years.

 

[RahRah]

Your LLC, I'm assuming, is a single pass-through entity that holds your real estate investments entirely....basically each property you've purchased isn't its own LLC?

That alone is going to subject your other investments you do not walk away from to the liability of the one you're looking to get out from under (which, personally, I don't think you should try to do).

Add to that, it won't just be your credit score that is affected....if the home is foreclosed and then sold at auction, you'll be responsible for any short-fall anyway - so you've not eliminated your indebtedness, just continued it, now without any property attached to the debt.

Add to that, the lender can also then place liens on your other property for the difference, take you to court for the difference, win a judgement that will stay with you until its paid upon the sale of one or more properties, or when you die and your heirs liquidate your estate.

One more add to that - the lender can also cut you a 1099, which creates a whole 'nother headache for you tax wise.

I'm not a lawyer, nor do I play one on TV, but I'd strongly suggest you make an appointment with an attorney, discuss your options and see if there is a way you can do some creative financing to keep the property and pay your debt you took responsibility for.

Perhaps you can offer the house in a rent-to-own option?

Perhaps you can refinance it and extend your payments out again so if you've paid off some of the loan (say five years) you can refinance it for thirty again, thus lowering your payment obligation each month?

Perhaps you can find a company in the area in need of an executive home and furnish it so they can rent it?

I don't know where it's located, but if it's a tourist spot, you might consider renting it out by the week or month to tourists? If it's a college town, maybe rent each bedroom seperately to students?

If all else fails, perhaps just keep paying your obligation from the positive cash-flow on your other properties?

 

[Lawlar]

Don't Make Payments

The bank will not take a deed in lieu of foreclosure so we are thinking of letting them foreclose. Our credit will go way down for several years but we do not know how low. We have always been in the high 700's and are wondering if this would change our present credit card limits we have had for years.

I disagree with those that believe you should continue making payments.

I helped thousands of people in similar problems in the 1990s. My advice then (as it would be today if I wasn't retired) is stop making the payments. The lenders won't deal with you until you are behind in the payments.

In California lenders normally cannot seek a deficiency judgment against you if you default on a mortgage (there are exceptions to this rule). The law may be different in AZ (and I believe it is). So you should consult with an AZ lawyer. Regardless, in this crisis you will eventually see the government and lenders formulate a plan to give mortgage relief to borrowers to induce them to keep their homes.

My clients were often able to buy another home within 2 years after filing a bankruptcy. A foreclosure is actually considered worse than a bankruptcy but it is not fatal.

I was in AZ two weeks ago and I couldn't believe the thousands of new homes that were built in the last few years. New homes for as far as the eyes could see. My wife's two sons bought homes there in the last few years and they are upside down, big time. I have advised them to stop making the payments. This was topic No 1 on the talk radio shows in AZ. I expect many AZ homeowners are going to stay in their homes, rent free - without making their payments - until the foreclosure process is completed and then they will simply walk away.

You need to consult with a reputable lawyer, with bankruptcy experience, to look at your entire situation. There is nothing immoral about filing bankruptcy or walking away from a bad deal (and if morals have anything to do with it, our financial institutions are in no position to point fingers - and in the 1990s many of my bankruptcy clients were bankers and real estate brokers - And I wish I could have filed the bankruptcies Donald Trump filed for his businesses.).

 

[Holly]

This kind of thinking is why we are in this mess in the first place. You have to be kidding? There is absolutely something morally wrong with walking away from your obligations...our financial institutions are wrong and you are too.

I disagree with those that believe you should continue making payments.

I helped thousands of people in similar problems in the 1990s. My advice then (as it would be today if I wasn't retired) is stop making the payments. The lenders won't deal with you until you are behind in the payments.

In California lenders normally cannot seek a deficiency judgment against you if you default on a mortgage (there are exceptions to this rule). The law may be different in AZ (and I believe it is). So you should consult with an AZ lawyer. Regardless, in this crisis you will eventually see the government and lenders formulate a plan to give mortgage relief to borrowers to induce them to keep their homes.

My clients were often able to buy another home within 2 years after filing a bankruptcy. A foreclosure is actually considered worse than a bankruptcy but it is not fatal.

I was in AZ two weeks ago and I couldn't believe the thousands of new homes that were built in the last few years. New homes for as far as the eyes could see. My wife's two sons bought homes there in the last few years and they are upside down, big time. I have advised them to stop making the payments. This was topic No 1 on the talk radio shows in AZ. I expect many AZ homeowners are going to stay in their homes, rent free - without making their payments - until the foreclosure process is completed and then they will simply walk away.

You need to consult with a reputable lawyer, with bankruptcy experience, to look at your entire situation. There is nothing immoral about filing bankruptcy or walking away from a bad deal (and if morals have anything to do with it, our financial institutions are in no position to point fingers - and in the 1990s many of my bankruptcy clients were bankers and real estate brokers - And I wish I could have filed the bankruptcies Donald Trump filed for his businesses.).

 

[RahRah]

Lawlar - the OP doesn't live in the home, it's not their primary residence....it's an investment property that is rented out, thus if they walk away, their current home is up for grabs by the lender in the foreclosure, in the form of liens and/or judgements, if the sale of the foreclosed property is less than what is owed on the mortgage.

Bankruptcy may protect their primary residence, but it sounds like they have other investment properties other than this one that is upside-down right now - and that means they'll potentially lose those properties if they go for a bankruptcy since they're not off-limits like the primary residence (in some states) - I don't know if the primary residence would be off-limits in a bankruptcy in AZ?

They have more than one investment property they're working with here - and this one is negative right now - not a reason IMO to walk away from the single one not making money....the others sound to be doing fine, so one loser in a portfolio of evens/winners isn't reason to walk away from an obligation freely entered into for investment.

 

[RahRah]

This kind of thinking is why we are in this mess in the first place. You have to be kidding? There is absolutely something morally wrong with walking away from your obligations...our financial institutions are wrong and you are too.

I agree! :annoyed:

 

[Defcon1]

Agree with previous post...

I am a Banker in California and here it's a single action rule here. They can opt to take the home by foreclosure or move against you personally trying get your other assets before taking the home - which I have not seen (I am sure some here will pipe up and say it's happened though). You should consult an attorney to be sure you understand your rights and the creditors rights if you decide to move forward.

K

ps.. Here, lenders can't go after you for a deficiency except under certain circumstance like fraud. Mostly the banks take the house and it's over.

 

[RahRah]

I am a Banker in California and here it's a single action rule here. They can opt to take the home by foreclosure or move against you personally trying get your other assets before taking the home - which I have not seen (I am sure some here will pipe up and say it's happened though). You should consult an attorney to be sure you understand your rights and the creditors rights if you decide to move forward.

K

ps.. Here, lenders can't go after you for a deficiency except under certain circumstance like fraud. Mostly the banks take the house and it's over.

Here is the relevant portion of the Arizona Statute discussing deficiency:

Section 33.729. Purchase money mortgage; limitation on liability

A. Except as provided in subsection B, if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

B. The balance due on a mortgage foreclosure judgment after sale of the mortgaged property shall constitute a lien against other property of the judgment debtor, general execution may be issued thereon, and the judgment may be otherwise satisfied out of other property of the judgment debtor, if the court determines, after sale upon special execution and upon written application and such notice to the judgment debtor as the court may require, that the sale price was less than the amount of the judgment because of diminution in the value of such real property while such property was in the ownership, possession, or control of the judgment debtor because of voluntary waste committed or permitted by the judgment debtor, not to exceed the amount of diminution in value as determined by such court.

 

[Icarus]

We have an eviction of tenant in the property which we may go to foreclosure.

What???

We have always paid all our bills on time but can not afford the negative cash flow which may persist. We are tired of most of our tenants and planned to be out of all rentals by 70.

Which "may" persist? So you want to walk away from your obligations on investment property because you took some risk and it didn't pay off for you?

And you aren't even sure if and for how long you will be in a negative cash flow situation? Did you think there might be a risk that you might be in a negative cash flow situation if you couldn't keep the property rented all the time? That's a standard risk for any real estate investment, isn't it?

Did you think that since you might not be able to afford the risk that a real estate investment wasn't the right thing to do for you? Did you put the bulk of your investment money in real estate?

Or is it just a matter of not wanting to use your savings which might put a dent in your lifesyle?

-David

 

[Egret1986]

Wow, I definitely agree there's something morally wrong.

This kind of thinking is why we are in this mess in the first place. You have to be kidding? There is absolutely something morally wrong with walking away from your obligations...our financial institutions are wrong and you are too.

I am currently experiencing the fall-out of someone walking away from their obligations and filing bankruptcy. Maybe some of us are mistaken, but it does sound like the OP is tired of being a landlord and doesn't want to be obligated any more for a risk they took on because when things were flying high in real estate and the economy was good, they thought there was money to be had. The OP hasn't indicated that their world is crashing in around them, they are about to lose everything and are about to be out on the street. It just sounds like things aren't working out as planned and they don't want the burden created by THEIR choices. There used to be a certain stigma about filing for bankruptcy and foreclosure. Now it just seems like many people and companies feel like, "why not let someone else deal with it; everybody else is doing it."

As Holly said, "This kind of thinking is why we are in this mess in the first place." Hello?

If it's just a matter of not wanting to be a landlord anymore and this is putting a crimp in your lifestyle and you're going to have to take a loss on a gamble you made, then I say to you "SUCK IT UP!" (quote from one of my fitness instructors I hear ringing in my head right now).

 

[gmarine]

You need to consult a lawyer. If you think you are just going to walk away and expect the bank to take the hit on the price drop while you continue owning another home(s) and have money in the bank I think you are mistaken.

And as the others said, this kind of thinking is what has gotten the country in this mess in the first place. Many people who have been upside down on home loans were able to talk away because they have no other assets for the bank to go after. You on the other hand are going to make a nice target for the bank to go after so they can collect the debt.

One way or the other your going to end up paying for your mistakes, as you should.

 

[ricoba]

While I empathize with your situation, it does appear as Fern point out, you speculated on the housing boom and unfortunately lost at that game.

As you are well aware, you are not alone in that scenario.

It would appear to be time to rethink and rework your original rental income/housing speculation plan. While you may have only planned on being in the market for 10 years, and then sell for a profit, that's obviously not going to happen. Simply walking away in my mind is not the best solution. Why not come up with some alternatives to continue to generate income from the homes? Simply not liking the tenants is not a reason to get rid of them. And while you may not have wanted to be landlords in your 70's, right now it seems that this may be your option.

Best of luck to you.

 

[funtime]

Advice to get an Arizona lawyer that specializes in real estate is a good one so that you will have legal advice prior to taking action. In that respect, a general practitioner is not advised - if the state has a board certification process, get one board certified in real estate.
I know what you mean re being tired of your tenants. I have had my share of bad ones. However, on the bright side, I think that the pool of tenants in terms of quantity and quality is going to be increasing - where are they coming form? Other foreclosed homes! Some of these folks really want their kids to stay in the same schools and could be long term tenants that work out well. So if you decide to keep the property, consider that you may not have as difficult time finding a quality tenant as you think you might have. Good luck with your situation.

 

[ricoba]

....I think that the pool of tenants in terms of quantity and quality is going to be increasing - where are they coming form? Other foreclosed homes! Some of these folks really want their kids to stay in the same schools and could be long term tenants that work out well. So if you decide to keep the property, consider that you may not have as difficult time finding a quality tenant as you think you might have. Good luck with your situation.

This I think, is a good positive spin on an otherwise very negative circumstance and I think it's good advice. After all the OP has been given a lot of lemons, and I agree that it's time to start making lemonade!

 

[Mydogs2big]

We bought our investment houses in the early 90's when everyone thought we were really foolish.

We had to pay more than the house cost us for a few years. The value of our houses stayed stagnant for 10 years, but rents increased because the population grows and no one wanted to buy. The last few years we doubled the value because any one that had half decent credit was financed into their own house- but our quality of renters decreased. Now we see better quality renters.

We are looking at the same thing now. If you own a house that's a couple hundred shy of it's mark, don't worry, rents will be increasing! Then it's just a matter of time before the houses continue to rise in value. (Remember no one is building now, but the population continues to grow) Sell then! Not now because you had a bad renter and the market says your house is worth nothing. Consider how much it would cost to replace (build) another.

I've always said landlords complain all the way to the bank. I've done it too.
Like someone else said "Suck it up"

 

[rickandcindy23]

Our rental property appraised for $195,000 5 years ago, and now it would probably appraise for less than we owe on it, and we put 25% down. I don't care because we have great renters who are taking care of the place. They have been there for 18 months, and they want to stay until their kids graduate from school.

Real estate values go up, and they go down. It's a pattern that repeats itself. The bubble burst, and it's happened before. Our house went down in value during the period of high interest rates, before Reagan came into office. We owed much more than it was worth, and there were foreclosures all around us. I was just glad we had a fixed 10.5% rate with FHA. The other folks were paying more.

I am with the others here who are asking why you think it should be easy to walk away from your obligations? We just lost a lot in the stock market, almost everyone did, and we just have to let it build back up again. Same with the real estate market. We will sell our rental property when the value goes back up to where it was before.

 

[dougp26364]

I disagree with those that believe you should continue making payments.

I helped thousands of people in similar problems in the 1990s. My advice then (as it would be today if I wasn't retired) is stop making the payments. The lenders won't deal with you until you are behind in the payments.

In California lenders normally cannot seek a deficiency judgment against you if you default on a mortgage (there are exceptions to this rule). The law may be different in AZ (and I believe it is). So you should consult with an AZ lawyer. Regardless, in this crisis you will eventually see the government and lenders formulate a plan to give mortgage relief to borrowers to induce them to keep their homes.

My clients were often able to buy another home within 2 years after filing a bankruptcy. A foreclosure is actually considered worse than a bankruptcy but it is not fatal.

I was in AZ two weeks ago and I couldn't believe the thousands of new homes that were built in the last few years. New homes for as far as the eyes could see. My wife's two sons bought homes there in the last few years and they are upside down, big time. I have advised them to stop making the payments. This was topic No 1 on the talk radio shows in AZ. I expect many AZ homeowners are going to stay in their homes, rent free - without making their payments - until the foreclosure process is completed and then they will simply walk away.

You need to consult with a reputable lawyer, with bankruptcy experience, to look at your entire situation. There is nothing immoral about filing bankruptcy or walking away from a bad deal (and if morals have anything to do with it, our financial institutions are in no position to point fingers - and in the 1990s many of my bankruptcy clients were bankers and real estate brokers - And I wish I could have filed the bankruptcies Donald Trump filed for his businesses.).

Wow, I received similar advice back in the '80's when my wife quit making payments on our home after we were divorced. It took me over 10 years to rebuild my credit to respectablity and that line about buying anything on credit only two years later has become laughable to me. I was sold the same line of BS and guess what, I couldn't get a loan for a tank of gas for over 7 years. I couldn't buy a car, buy a home and had to take out CC that were very low limits with banks of questionale reputations in order to build up any sort of credit very slowly.

I do not believe this is good advice either for the consumer, the bank or the country.

 

[PigsDad]

Gee, wouldn't it be nice to take out a loan, purchase some stock in some company that you think might be the next Microsoft, and if the stock goes down instead of up, just walk away from the loan?

This is exactly what the OP is thinking of doing. They bought a speculative investment, and instead of paying off for them, it sank in value.

Walking away from that is not a moral issue? Hardly!!!

Kurt