Q: Four years ago, I financed this rehabbed property located in Atlanta on a bank appraisal of about $110,000. The current loan balance is about $88,000 on an interest rate of 6.625 percent. But the home’s current value is about $25,000. My bank has valued it at under $50,000.
The rent I get barely covers PITI. It’s an investment property so I can’t benefit from the Home Affordable Refinance Program (HARP) and I’m in a job transition so my bank won’t refinance the loan to a lower interest rate. I asked the bank if they’d be willing to lower the principal owed on the loan to $50,000. It doesn’t make sense for me to keep the home but don’t want the foreclosure or short sale on my excellent credit. Any suggestions?
A: It appears that you can afford your payments on your investment property but you’ve decided that your investment has soured and may not want to make your payments going forward. You have excellent credit, want to avoid foreclosure and don’t want to go down the short sale route. If you want to keep your credit intact, you will have to continue to make your payments.
You made a bad investment. You borrowed money to buy an investment property that has resulted in a real loss. However, if you think of it differently, if you had borrowed money and purchased stock and you lost half your value in the stock market, you’d still owe your lender the money you borrowed.
You could cut your losses, sell the property now and use cash that you have saved to pay off the lender. While not many people have $60,000 to use to pay off a loan now, that may be your only choice to get rid of the property and the loan. If you have the money, you may want to consider dumping the investment and paying off the loan.
Otherwise, your other choices may damage your credit. You may also find that you may still have the obligation to pay the debt you owe the bank – that is unless you decide to file for bankruptcy.
As you have found out, there is little help in the marketplace for underwater borrowers on investment properties. The government doesn’t have a plan in place to help real estate investors and lenders may not be willing to come forward and help those real estate investors for their “poor” choice of investments.
If your lender agrees to write down the debt you owe, to allow you to short sell the property or change the deal in any way, the lender may report any of those changes to your loan to the credit reporting bureaus. If they write down the loan, you are not paying the full amount you owed, and they can report that as a negative. If you short sell the property and the bank does not receive the amount they are owed, again, you’d find them reporting you to the credit reporting bureaus.
You can try to negotiate your loan terms with the lender, but if the lender knows you can pay, they have no incentive to take a loss in what they would have received from you on the loan. The only way you might be able to get out from under your investment choice and keep your credit intact is to pay the lender off in full.
You might also want to talk to your accountant. As an investor in real estate, you might have benefited on your federal income tax return because of tax losses on the ownership of your investment property. If you sell the property at a loss, you may be able to use that loss to offset other tax gains. Those gains and losses may affect your federal income taxes now and in future years. For this reason, you should go over your tax situation with a professional.
Finally, if your lender does write down your debt or even allow you to short sell the property and write off any of what you owe, be prepared to face a tax bill from the federal government. When the lender changes the terms of your loan and agrees to accept less than the full amount of your debt, that difference is a taxable gift to you. That deficiency could increase your federal income taxes significantly. You need to keep that in mind as well.