Best Way To Dump So Cal Rentals Gone Bad

[Chris Sweeney]

They have two expensive/alligator houses bought at the peak about 6 years ago. The owners are independently wealthy and thus are not concerned about their 800+ FICO scores going away. All loans are purchase money non-recourse. Here are the specs:

Big House
Purchase Price $1.5M
1st & 2nd Total $1.35M
Market Value $1.25M
Completed Rehab $150k
Rental Value $5,500 per/mo
Purchased as a 2nd Primary Residence
Loans are 5/1 IO ARMs that have adjusted down considerably with 6 mo adjustments thereafter.
1st & 2nd & Taxes = $4,140 per mo.

Not So Big House
Purchase Price $1.255M
1st & 2nd Total $1.13M
Market Value $975k
Rental Value $3,750per/mo
Purchased as a Investment Property
Loans are 5/1 IO ARMs that have adjusted down considerably with 6 m. adjustments thereafter.
1st & 2nd & Taxes = $4,836 per mo.

The options being considered to offload these properties include:

1.Stop paying each note one at a time in attempt to settle each note one by one.
2.Stop paying all at the same time and doing short sales on both.
3.Continue renting the properties at a loss each month till the market demand begins to recover then offload.
4.Stop paying all at the same time, saving the rent and after 12 months offering the bank(s) the rent savings to do a died in lieu.
5.Do traditional sales on both and cough up the difference.

The owner is concerned about the 1099 they’ll receive from doing short sales or judicial foreclosure if the bank says loan fraud with the Big House property that the owners never lived in. There’s also concern that if they attempt option 4 the tenants will be a major headache once they get wind that the properties are in foreclosure.

The Big House is currently vacant (as of a week ago) and the Nice Starter Home has tenants with about 9 months left on their lease. Both are turnkey. The seller is not interested in doing a wrap or anything like that.

Any input on the best way out of these with the least out of pocket and legal action exposure would be appreciated.

[Jon Holdman]

These were probably appreciation plays. In 2005 everyone thought real estate would continue on its 10%/year appreciation trajectory. So, after seven years a $1.3 million house would be worth $2.6 million. Many investors think "cash flow = Rent - PITI", so these were losing $1100 a month. After seven years, you loss is $92,000. Maybe you even get some rent increases along the way and reduce that loss. But you make $1.3 million (costs? what costs?) $1.3 million - $92K = $1.2 million. Woo hoo!