Changing the terms on seller financing? (bought $126k, now worth $75k)

[Jeff Thompson]

Hi everyone, I've have a rental I co-own with my father. We bought this 3/1 in northern California in mid 2008 for 126K thinking how much lower could it go? Today it's worth around $75K with around $91k remaining on seller financing (originally $98k at 6%). We also rehabbed the house very slowly... My father contributed 14k total cash and did most the rehab work, I'm about $35k personally invested, and we have another $16K unrealized losses.

The home rents for $900 and has a mortgage payment of $587, insurance $60, taxes of $100, so $747 a month, or $153 cashflow rented. Yes, this was a horrible choice of a rental from the start, but I didn't know any better. Now my choice is to try and make the situation work, or dump it.

I've been living overseas and letting my father deal with it... I think it's a bit under market on rent, so $1100 is may be possible, and I can probably reduce insurance and get a reappraisal (taxes) to get maybe $50 less a month there. I might be able to convince to previous owner to change the agreement on our loan. If I can convince them to accept 4% the payment would drop to around $450. In this scenario monthly expenses are $560 and cashflow rented of $540. Still not the greatest deal, and this is the best case scenario, but probably would at least stay afloat.

Selling would mean realizing further losses, but may be able to work with the previous owner to avoid ponying up the cash right away, or maybe even split the difference or full on short sell (we have made $21k in interest payments).

The previous owners and "bank" I'm dealing with is an older retired couple who lived in this house since the 60's. Either case hinges on making a deal with them. How would you approach this situation?

Thanks,
Jeff