Foreclosure and LLC in California

[Ann North]

I think this Forum might be a better place to help. I would like any advice on our rental property condo/townhouse in California that is in Pre-Foreclosure.

It's complicated and I'm trying to figure it all out.

-The property is Pre-Foreclosure with NOD (no sale date) with an offer from a new tenant who wants to cure and do lease option to buy. I'm nervous because I'm in another state. My head is spinning from it all. They are in love with our house. Our other tenants were great and moving out after long-term lease but didn't pay full mortgage amount (which is how we got behind in addition to a layoff) but things are better now.

-If they cure default, that will count as income? Even if goes directly to bank? I hired a lawyer to help draft the lease. Can they just pay bank directly? I'm trying to get bank to negotiate on lump sum reinstatement amount and they won't. The Foreclosure Attorney tells me to talk to the Lender and the Lender (who is very nice) tells me to talk to the Foreclosure Attorney.

-What are the Foreclosure implications in California on a rental property? 

-A Lawyer advised putting the property into an LLC because it wouldn't hurt our credit as much, is that accurate?

-Should I form an LLC and put property into it? What are the tax implications? 

-If property is already on our credit does it show as transferred to LLC - paid off?

-The Lender says we can apply for a Loan Mod again. We were denied the first time because they viewed it as an investment property (even though it was our home and we had to rent it out) and on income vs. debt. Perhaps this would be an option.

We want to

A) Not end up Owing Money

B) Not have our credit be destroyed with a Foreclosure or Short Sale- we have to buy a house again in our new state

C) Have the Tax damage minimized

D) Not Make Situation worse or more complicated

E) Would like to hold onto house as rental because it's appreciating in SoCal

Thank you!!!

[Ron S.]

I get that. Been there. Done that. Was a reluctant landlord from California with my old primary residence in Colorado in a gated community...same stuff. It's a dichotomy, the better your home is and the more its worth, the better quality tenant you think you'd get and the fewer problems you would think you'd have but its often the opposite.

Anyway, at the end of the day, if you owe more than its worth and you try to sell it, it would be a short sale. The lender will look at your application for a short sale the same as they would for a loan mod. If the numbers work, and the deal is structured well (No kickbacks, payments outside of the HUD, excessive funds to junior lien holders, etc.) they would approve it. If it's worth more than you owe, it's not a short sale and you wouldn't be considered.

California is an anti deficiency state and there are laws about borrower contributions to short sales (They can't ask you to pay anything on a short sale. Nothing, zip, nada). That said, they CAN say, "well, someone needs to come up with $X dollars because we aren't going to do it". That's when brokers/agents/title companies/buyers and anyone else with a pocket, all of a sudden become deaf and lose the ability to speak English.

I do think what you are asking for is unreasonable, or at least, unrealistic but hey, ask for the stars, settle for the moon. If you were my borrower, I would pose the same options for you as I listed previously. I would send you a loan modification package to fill out. I'd give you 30 days to do it and if you didn't do it, or if you did and didn't qualify, I'd start my foreclosure and I wouldn't stop my foreclosure (or put it on hold) unless you brought me current or brought me a buyer. There is nothing for me to negotiate with you as my actions (for your lack of action are) are standard and automatic.

Nothing about what happened in the past has any bearing on where we are today. I mean, it does to you and it does to me but to the lender/servicer, it's cause and effect. Pay = everything is ok. Don't pay = default and subsequently foreclosure if alternatives are not pursued and executed on. That part is kind of a misnomer in the sense that the alternatives are finite. Sell it, bring it current, modify it or go through foreclosure.