Q: We purchased a single family residence for investment with another couple in California in early 2005.
Our intent was to hold the property short-term, then sell it. We took out a standard adjustable rate mortgage (ARM) to purchase the property, and we are all co-borrowers on the loan.
Unfortunately, we purchased this home at the peak of the market and now we can’t sell it. It’s been 2 years since we’ve started to sell it and we’ve lowered the price of the home below what we paid for it. Meanwhile, it’s costing us each about $1,000 a month.
Our loan will convert to a variable rate loan at the end of 2009.
Both couples are hurting for money, but our partners are in worse condition than we are. If they became unable to make their portion of the mortgage payments, would we have any recourse with the lender? We can handle our portion of the payments for now, but we couldn’t cover theirs as well for any length of time.
In a situation such as this, are lenders ever willing to work with the borrowers? We have excellent credit and I’d hate to see us lose so much because of this one mistake. Your counsel in this matter is greatly appreciated
A: Unfortunately, your situation isn’t unique. Many people became real estate investors the last several years until the market forces changed. It didn’t occur to them, as it didn’t occur to you, that the good times wouldn’t last forever. Without planning for a worst-case scenario (which you’re experiencing now), many of these people should never have become real estate investors.
You have genuine pain but it’s unlikely that anybody can really help you without a change in market forces. In some parts of the country there are far too many homes for sale and too few buyers.
You and the other couple are in the same boat and while they may have worse financial issues, if they stop paying their share of the loan and you don’t pay their share for them, both of your credit histories will be hurt.
Let’s go over your options. You can to rent the home, which will at least give you some income coming in to cover some of the costs and limit your losses. When the market changes again, you can sell at that time.
Your second choice is to sell the home at any price. You’ll lose whatever you put into the house and, if the sales price (and commission) are below the amount of the mortgage, you’ll have to either dig in out of your own pockets to pay the missing amount, or negotiate a ‘short sale” with your lender.
In a short sale the lender agrees to take the proceeds from the sale of the home to pay off the mortgage even if the funds aren’t enough to pay off the loan if full, the lender accepts the partial payment.
But if you have other assets (like a primary residence with a lot of equity), your lender will want to see what else you can offer to settle the debt. If you and your partners have other assets, the lender may not be willing to accept the short sale.
Why would a lender be willing to lose money if they can get you to pay up?
If the lender accepts a short sale, the amount on the debt that you would not have to pay would be considered income to you and you would pay federal income taxes for that amount.
Let’s say you sold the home for $100,000 and the loan amount was $110,000. For federal income tax purposes, when you file your tax return you and your friends would have income of $10,000 due to the forgiveness of $10,000 of the loan. There is some talk in Congress about changing this rule, but it may wind up just helping those who are short-selling a primary residence.
Your last choice is to continue to market the home as you have been doing with the hope that someone comes around and decides to buy your house. You may lose some of your investment, but not all of it. But at $2,000 a month in expenses, that monthly loss may eat away at the money you put down on the home when you purchased it.
Finally, and it’s not a great topic for discussion, but if you or your friends are overwhelmed by debts, your last option may be bankruptcy. While you don’t seem to be at that breaking point, it could get there, particularly if your partners stop paying their share of the mortgage. The person to speak with is a bankruptcy attorney.
It would be great if there were other options, but with the robust real estate market we’ve had over the last decade or so now slowing dramatically, everyone is wondering what it will take for the markets to reach a balance again.
Dec. 10, 2007.