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“An Open Letter to Anyone with Investment Properties with Bad Mortgages…”
Millions of Americans invested in rental properties in the past 10 years. With annual appreciation in the 10%+ range, lenders willing to finance up to 100% of the purchase and tax advantages galore… who wouldn’t?
Myself and most of my clients all got burned in the recent boom then bust of the market, and we’re all dealing with the grim new reality of real estate in the USA—proactively.
Smart homeowners in trouble are taking action with 3 distinct strategies I call “Cash Max,” “Cherry Pick,” or the “Charlton Heston” approach.
Let me explain what these mean…
CASH MAX is a strategy for those ready to throw in the towel and move on. This is rarely the best choice, but sometimes, the house is so upside down and messed up—or the timing is bad—and it’s the only option left.
Here’s an example:
John A. bought several homes in hardest-hit areas of Florida with a highly leveraged position. Today, all four homes are more that 50% upside-down. He’s 50 years old, has a steady income, and a reasonable retirement set aside.
If he walks away now, he can recover and continue to grow his retirement assets over the next 20 years. But if he tries to hang on to these homes with over $600K of negative equity, it’s a lost cause. He’ll be dead or dead broke by the time his investment actually starts to cash flow positive.
John and the bank lost their mutual bet on the long-term value of his home, and now, the legal arrangement they made (a.k.a. his mortgage) is being used to divvy-up the damage. John lost his investment and the bank will soon learn that they will lose theirs as well.
CASH MAX ACTION PLAN
1. Stop paying the mortgage
2. Protect all other assets
3. Meet in-person with a local bankruptcy attorney
4. Be sure you fully understand the recourse your lender(s) have
5. Use whatever legal means available to delay all transactions (you might as well keep your home(s) until they kick you out)
CHERRY PICK is a strategy for people with multiple properties, some with equity and some with zero or negative equity. This strategy involves simply picking and choosing which homes you’ll save, and which homes you’ll let go.
Let’s look at a case study:
Tim owns three single family homes along with his own primary residence. All the loans were initiated as primary residence mortgages, though his extra homes are now rental properties.
Tim used ballooning equity from one home to purchase the next and found himself in 2006 with two homes that had almost no equity because he had leveraged them and one home with no equity because the value had literally fallen by 60%.
Tim is a home builder, and his business is ½ what is was just 12 months ago, so his income has dropped dramatically.
Tim will get a big income spike in 6-12 months at which time he’ll qualify to modify his own primary residence without a problem. Now for the cherry picking… Tim gets his bank to agree to a short sale on two of his three rental properties, and as they sell, his debt-to-income ratio improves drastically making it easier and easier to pay for and eventually modify his primary residence and one remaining rental unit.
CHERRY PICK ACTION PLAN
1. Stop paying the mortgages on your “losers”
2. Stay current on the “winners”
3. Act swiftly to aggressively short sell your “loser” properties by employing a short sale flipper or a real estate agent you trust
(call me if you need a referral)
4. Immediately initiative the loan mod process for your “keepers,” but drag it out until at least one of the “losers” sells (then you’ll be in a better debt position for a loan mod)
THE CHARLTON HESTON has become my own strategy of choice. Although I did give up one home to a short sale in 2008, my attitude on the rest of my homes has been that no one is taking them from me except from my “cold, dead hands.”
Excuse the melodrama, but that’s how I feel. Buying a home is a serious endeavor—emotionally and financially—and I’m not giving any of mine up. I believe (along with most of my clients) that owning property is almost always a better position to be in than not owning, and I’ve decided to “ride-out the storm” of this economic implosion without acting hastily.
It is a hard-nosed strategy that requires brains and nerve and vigilance—and also enough income to qualify to modify your loans.
CHARLTON HESTON ACTION PLAN
1. Develop a strategy using loan modification, short sale initiation, or a deed-in-lieu request as leverage in negotiating with your bank
2. Clearly understand the foreclosure process in your state so you don’t make a silly mistake
3. Understand your lender’s recourse (if any)
4. Modify, modify, modify… the goal here is to lock in a fixed below-market rate for the life your loan and keep you home(s)
I will send you updates as we can add more clarity and more action items for each strategy. Please let me know how these ideas jive with what you are seeing in your work.
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