Investors often tell me
that they own a home, tenants left or are not paying their rent, and the
property is not cash flowing (mortgage is more than the rental income). What is
an investor to do? Most tell me that they have put in too much money to let the
house go via short sale or foreclosure. Â Without knowing the actual
financials of a situation, it is worth considering whether the time value of
money makes a short sale a better option than holding on until the market
recovers. To illustrate, here is an example:
Investor buys a house
for $350,000 in 2006. Â The tenant pays $1500 per month, the mortgage
payments on $300,000 is $2,250 with tax and insurance.
The house is now worth
$225,000. Â The investor loses his job. Â Tenant leaves and new tenant
can only pay $1250. Â The investor canâ€™t afford to pay $1,000 out of pocket
each month, which is the difference between the rent and the mortgage. Â
The investor tries for a
loan modification and is denied; he tries again and is denied several times
before he gives up.
What does the investor
If the investor can show
true hardship, he can either (1) use up all of his resources to keep the home;
of (2) attempt to short sale the home.
Often investors will
say, â€œI donâ€™t want to lose the $50,000 I put into the property?â€ â€“ they should
consider the following.
No Short Sale: Â Starting $125,000 in the hole, the owner pays $1,000 a
month for 5-10 years for the value comes back to 2006 level and ownerâ€™s equity
to return. Â Investor will have to pay $24,000 or more to keep the place
from going to foreclosure (assuming 2 years without rent increasing).
Short Sale: Sell the property and start over. If the lender will agree to
waive any deficiency liability, the investor can walk away from $125,000 in
unsecured debt. Â Investor can clean up his credit and buy again in 2-3
years. Â Instead of investing $24,000 to keep the payments up, the investor
can use that $24,000 to invest in a property and at year 3 has $24,000 in
equity in a new property that is appreciating instead of still being more than
$100,000 in the hole.
Please contact a NextGEN representative if you have any additional
questions at 877.647.3911.