Anyone ever walk away from a property?
 

While it's the last thing that I would want to do, if the economy keeps getting bad, at some point I may consider walking away from an investment property we bought in Orlando.

Like others, I am guilty of making a bad decision thinking the market would continue to go up, and I would be able to make some quick cash. Now the opposite holds true as I will definitely wind up losing money, and more than I can afford at the moment.

It currently has been unoccupied for 2 months and there does not appear any end in site, especially during these difficult times.

Even when I had it rented, I was losing money every month.

Before I did that, I would consider a short sale as it is barely worth what I paid for it. The developer still has some on the market for more that what mine I paid, but is offering huge incentives.

I understand the tax implications of a short sale, as I would be taxed on any losses the banks take.

Maybe a one shot deal is better than losing well over 1000 per month.

Any thoughts are always appreciated.

I did a short sale in March on my home I boight for 257k (financed 100%)in 8/2006 and sold for 235k in 3/2008. Right now I consider it a steal getting out of it at a small loss considering the way the market is.

Legislation was passed that suspends paying taxes on the short sale. I guess I'm not positive it extends to second homes. So you no longer pay capital gains taxes on the bank write-off.

I had just gone through a divorce and neither of us could afford to live in the house so we had it on the market. I eventually got to the point you are at right now. I went through the options just like you. I was mentally ready to walk away. But looking back that would have been a bad choice. I decided to start negotiating with the bank that had my loan and slashed my price. I priced it low enough that 3 offers came in. I got MORE than the price I had dropped it to. I also got 18k written off in a short sale and I got an unsercured loan for 12k and my ex got an unsecured loan for 7k from the bank that held the loan.

I consider getting out of that mess with only a 12k loss a steal.

Hang in there. My advice. SELL IT. Slash the price. Start talking to your loan company daily. Pester them. Ask for supervisors. They need to know that you are ready to walk away. The last thing they want (if they can prevent it) is to foreclose. They are overwhelmed with foreclosures and don't want any more. They most likely will be willing to work with you but they are just overwhelmed. Stay on them.

One year from now your house may be worth 25k less than it is now. Get out now rather than bleed yourself to death.

They won't short sale an investment property if you have any other assets. IE they will expect you to pump any cash you have into that property to keep it afloat.

If you let it go into forclosure, not only will you ruin your credit, they will come after you for the difference after they auction it off. So if you say have a lot of equity in your primary house, 401k, etc they will get it.


IMHO you have a two options:
1. Keep paying and maybe in 10 years it will come back.
2. Fire sale and come to the closing with a check.

I'd talk to a lawyer about your options, if you went bankrupt you might be able to get out of it. Other than that your stuck.

One more point, at what point will it cash flow? Buying a negative cash flowing property is a horrible idea, but if injecting some cash into it can at least make it break even that might be a way to go. If you can get the monthly cash flow at least even, than it doesn't matter what its worth.

Not true, they will and do short sale an investment property I handle them all the time.... and they can't take your 401k either unless they can prove that you used the 401K to shield your assets.

Plantman, if you're upside down in the house and its financially crippling you explore the option with the help of an attorney that handles short sales. And don't let the credit score scare drag you into even more debt by dipping into reserves to keep a bad investment afloat. I made that mistake myself, I was so scared of hurting my credit that I sucked a vast cash reserve almost dry to sell properties I was holding I know hind sight is perfect but if I short saled the properties my credit would be restored by now and I would still have my cash........but I have a great credit score that does nothing for me.

Plantman, all of that is way over my head. Is it a lot, house, condo? No promises but my brother (and his 2 BIL's) are looking for a place in the Orlando area near his in-laws' house. PM me the details and I'll pass them on. I have no idea what they're looking for other than they're looking.

If you have other assets, they will pursue you. Consider another alternative to just walking away.

Not on a short sale.

IRS News Release IR-2008-17 , February 12, 2008.

[ Code Sec. 108]

Repossession and foreclosure: Cancellation of debt: Debt forgiven. --

Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on IRS.gov.

"The new law contains important provisions for struggling homeowners," said Acting IRS Commissioner Linda Stiff. "We urge people with mortgage problems to take full advantage of the valuable tax relief available."

The late-December enactment means that reporting procedures for this law change were not incorporated into tax-preparation software or IRS forms. For that reason, people using tax software should check with their provider for updates that include the revised Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS reminds affected taxpayers to consider filing electronically, which greatly reduces errors and speeds refunds.

The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).

The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).


Comments:

This relief only applies to acquisition debt for a principal residence.
If you refi'd and took out debt over that amount, well, technically relief of that is taxable, imo.
This relief only had a three year life, which now is 15 months. :eek:;)
Edit.
And debt forgiveness is taxable as ordinary income.

Agreed.

My statement assumes that Plantman hasn't yet fallen behind on his payments.

A bank will not likely enter into negotiations with a property owner unless they have already fallen behind on their payments. In other words - a short sale won't happen without "pain" in the form of ruined credit or other remedy to the bank.

To me, "walking away" implies Plantman is current on his payments, but doesn't want to continue sinking more dollars into the property for financial reasons.

In determining whether to agree to a short sale, his lender will look at his financial picture and wonder why he:

1. Still has an income that can pay for the note.
2. Has $XX,000.00 in equity in his primary residence
3. Is current on the payments

As they peer into his world, they will wonder why they (the bank) are the only one 'losing' in this scenario. They very well may deny considering a short sale until he defaults, loses his income or has no other assets from which to draw equity from.

You have assumed correctly on all points. I have not made lated payments on anything, yet, and hopefully I won't. Just exploring options in the event I do fall behind.

The checks I usually receive in the mail for my business are coming further and further apart.

I don't want to declare bankruptcy, nor will I if my income stays at it's current level, even if I ge paid a little slower. I'll just have to reorganize and prioritize.

I have used credit cards and other financing to keep my business solvent, in addition to maintaining a certain lifestyle(bad move), which is my number one priority in terms of debt elimination.

I contacted consumer credit, and can conservatively be debt free of all of my other obligations in 3 years. That's being very conservative as I plan on knocking off a large chunk of the 60k my business owes before the end of the year. At least 20-30% if all goes as planned. I have not signed up yet, but may do so in the next week or so.

Repaired, or slow credit is way better than bankruptcy.

I will approach my bank about the property and see what they say, they may tell me to go fork myself! HA!

In anticipation of perhaps a continuing downturn,

On another note, a real estate management company I contacted believes they can rent it out rather quickly and I will "only" be losing 600 a month.

At least I can use that as write off in case I can't sell.

Thanks for all the replies.

I'd be fairly skeptical about the management's company claims. If you can't rent it, how can they?
You're only 'losing' 600 a month if you're going to sell it for a loss in the near future. If you hold it long term, you're investing 600 a month into an asset.

Obviously every situation is unique, regarding short sales the new protocol with lenders is to negotiate at any point lately I've seen borrowers have a better hand with the mortageor as long as they keep the payments current. Waiting until the payments were late was plain stupidity on the banking part IMO. I do agree that he should continue to take a loss and wait for the market to turn around but I'm not the one with his checkbook..once again he should consult his CPA and Attorney to evaluate his position.

What would it cost you to be 'done' with it? $20K? $30K? $40K?

Depending on your answer - and truly how badly you want to be rid of the property, I would consider doing a short term lease (6 months) for renters, pull equity from my primary residence and drop the selling price drastically. You'll come to the closing table with a check.

You can check with your tax advisor, but the loss may be able to be deducted.

The alternative is to consider owner financing or continue to bleed $600/mo for the foreseeable future. Even so, losing $600/mo for 3 years is $21,600 - but spread over time instead of taking the instant bath on a quick sale.

****

Me? I would hang onto it. Rent it for as much as you can get to lessen the monthly bleeding. The market will improve at some point and your options will be more plentiful at that juncture.

Change your lifestyle at home. Get your business debt-free....things will improve.

Good luck! :)

not to stray from the topic but I have to hand it to you guys this is the greatest Forum ever- it's nice to know in bad times there is a place where you come and get help for almost anything from repairing a house, placing a kitten to selling and finding financing for an upside down house. It's nice to be part of this Forum, thanks guys.

I agree, and you can always count on the old-timers(pun intended) to chime in with some well thought out responses. New guys as well, but Kerry, Med, Botnst, etc.... they always have some input, even if it's not what you want to hear.

Back to Kerry: I had it rented for (1) year and was losing 600.00 per mo.

It's been vacant for 2 months, as the former management company went under, I was left with a bit of a mess as far as keys, access, etc... and then having to find a new one, that is making claims as far as being able to rent it.

The property is in Orlando and it's something that can't be done long distance.

Best case scenario I rent it and lose nothing, which is a pipe dream. Next best case is I rent it and don't lose my shirt.

Like Howie said, things should turn around and I am making payments into an investment that I bought at a good price, all things considered.

Worst case, economy get's worse, I can't rent it and I will have a tough decision to make.

We shall see.

Thanks!

The market will come back, always does.

The attorney I talked to in the spring that does them said they will come after you if you have money. Hardship must be proved, ie can't pay. I'm sure in light of recent events thats probably changed a bit.

I let a rental property go into foreclosure in 1992.

One thing to consider is this:

After the bank sells the property, the difference between what you owed on the property, and what the bank eventually sells it for is called debt forgiveness by the IRS, and they consider it like income.

You will get a 1099 by the bank for that "debt forgiveness" and you will pay income taxes against it.

So, if you owe $250,000 on the property, and they sell it for $200,000, the IRS considers that $50,000 as income.

If you are in the 25% income tax bracket, you would owe $12,500 in federal income taxes.

In any event, you need to speak to a real estate attorney and a CPA to take everything into consideration so you know what's coming.

Well, I don't have much cash these days and they can't come after your primary residence AFAIK.

We'll see.

I believe that they can put a lien on the primary residence so that when you do sell that some day they will get their money then.

I feel your pain. I have a rental property in Palm Bay. It's an older house that I bought not at the peak of the market, but when the market was headed up. I paid $140K for the house. Builders in that area a giving brand new, bigger houses away for under $100K. Those same $100K houses would have been over $200K a few years ago.

I had some real good renters that took good care of the property and paid on time. I considered myself lucky to only be losing $300 a month on the house. They just told me they lost one of their two jobs and can no longer afford the rent. They are moving into a room at a friends house.

I have my house in Diamondhead, MS rented out and have been very lucky. Took a loss the first couple of years and now I'm breaking even. The house I bought a year ago in NOVA is another story. I'm seriously upside down on this one. Nothing to do but ride it out. Good luck Plantman and try to stick it out.

Thanks, that's my first inclination, with the housing market so bad, you would think renting would be very popular.

Oh. How many short sales and foreclosures have you handled?

Thankfully none, I have zero interest in getting involved in any.

If the bank agrees to a short sale, do they not have the capability to attach other assets of the borrower to make up the difference?

Or, is it the very premise of a "short sale" that they take whatever the house brings and leave it at that?

On a typical foreclosure, they'll come after the borrower for everything they can possibly find including future income.

The short sale is an agreed price between the lender and consumer, other assets have not played a role in any transaction I have seen or handled. I also have not seen or heard of the bank peering into income or other assets either. Once the short sale is done...it's done I've seen some peoples credit be fine and I've seen it report, settlement on less than agreed.

It's an option the banks have been stingy on that is gaining in popularity, they should have been doing it sooner IMO since they would not be taking over worn down properties.

We've done background checks on slow pays for a mortgage insurance company.