Rental underwater, want to sell, would bank short? Other options?

Question

I owe like $80k on a rental that is worth maybe $60k.  It has been a dog for years and costs me money each month.  I have owned it for almost 10 years and would just like to get rid of it.  Is there any chance the bank would settle for a discount on a performing loan?  Its a local bank, i have paid off 4 or 5 other loans with them in the past and have a good relationship with them.  Any other options?  Maybe they would release the mortgage and I could pay off the $20k difference over time so I dont have to come out of pocket?  I dont want to start asking questions too soon because I'm sure they assume the LTV is much better than it is.

Larry Flanagan · Answer

I think i'll start paying an extra $1000/mo on it and in a couple years I should be able to get rid of it without needing to come to closing with a pile of $$.

Antonio Esquivel · Answer

Why is it under performing? Not enough rent? Maintenance costs?

Jesse T. · Answer

Do you have a property that you could borrow against for either the entire balance or the deficiency?

While you still will be down 20K, you will be free to sell the property.

Would the tenant be interested in purchasing and able to get financing?  That might net you more than having to go through the costs of putting it on the market even giving them a small discount.

Alexander Felice · Answer

I think the responses in here are right. The bank isn't going to want to take a short on that deal just like you don't want to take the short deal every month on the property. You've made good on loans with them before, they are open to more funding to you in response. If you tell them you want them to lose out just so you don't lose out that doesn't seem like it would facilitate a mutually beneficial continued relationship.

Without knowing the market or property condition, is there any improvements you can make to the property that will help you come out ahead in the long run? I know it seems crazy to sink money into a sinking ship but perhaps there is a way to increase rents and value that will make sense later.

Sorry for not providing more useful information. I wish you luck though!

Arlan Potter · Answer

Keep it. Raise the rent. make it work a few more years and the debt will be done.

Ron S. · Answer

It ceases being a "Performing loan" the minute you make that phone call. Depending on the purpose of the loan, you may be subject to a deficiency (MAY...there are anti deficiency states and regulations to consider). You cease having a good relationship with them as well. If you have other lines with them, you risk them being frozen or the ability to use them, being taken away.

Joel summed it up pretty well assuming you are not in a single action or non deficiency state.

You have to document a financial hardship to be considered for a short sale for 99.99% of all potential short sale scenarios out there. To be considered, you are in imminent danger of default, you have no equity and you have no reserves to service the debt. Being underwater means nothing and losing money each month means nothing if you have the means to service the debt.

The second you bought your car it was underwater but did you go back to the lender and ask them to take it back because of lack of equity?

Matt Anderson · Answer

Hi Larry,

In the past banks would not do a short sale on a loan that was performing. I haven't been doing short sales lately so unless something has changed the answer is no in terms of a short sale. Short sales also typically require a hardship which by the sounds of it is not applicable in your situation.

Logically speaking what would be the banks motive to discount their note? Banks sell notes all the time so it could be possible that they would take less then currently owed if interest rates have increased from your original loan rate. I'm not sure I see that happening though.

Seems like this might be a good learning experience for all the newbies out there to double and triple check their math before purchasing an investment.  Not trying to throw stones I just think that we can learn from others! Has it always been underperforming? Are there any expenses that you could lower or boost income? Maybe lower property taxes? I wonder what the interest rate is and if you could or would it make sense to refi? I would love to hear if anyone else has another idea. Additionally I would also like to hear what went wrong with this investment if you're willing to share.  Any lessons that you learned from it? You know teachable moments?!

Thanks in advance and if I run across a solution/idea I'll be sure to let you know!

All the best!

Joel Owens · Answer

If they have  a personal guarantee from you and you are not insolvent then I do not see that happening.

They know you have assets and income and will go after you rather than taking a loss.

The 20k is usually a promissory note where the bank agrees to release the collateral for XX and then you keep paying the difference.

The bank might require you to secure the promissory note with one of your other properties that has equity to attach to until it is paid off.

If you are paying 20k it will still cost you money but you will not own the property anymore or deal with tenants in a crummy area etc.

No legal advice given.

Rental underwater, want to sell, would bank short? Other options?

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