Q: I currently have three rental properties in two different states. Two of my rental properties are killing me. I’m just bleeding money, and I’m considering a short sale.

My wife and I have a successful business, but we are getting drained by our rental property situation. I am worried about the effect of a short sale on my personal financial situation, but at this point we are bleeding so much money each month we are headed for years of problems.

I need to know what I should do or where I can get some help in analyzing the situation to make the best decision for the future. Your advice is greatly appreciated.

A: If you’re bleeding money, you need to figure out how to stop the bleeding. There are a couple of options you might want to consider.

If you decide to sell the properties and the real estate values for these properties have gone down, you may find that you are short money to close on the properties. That is you owe more on them than they are worth – a short sale.

If you can get someone to quickly buy your properties and if you can get the lender to agree to a short sale, then at least you’ll be rid of the ongoing expense.

If you decide to rent the property (assuming they’re not already rented) and you can at least partially offset your expenses and buy yourself some additional time for the local market to recover, then you might want to do that.

If you can’t find a buyer and you can’t find a renter, then you may want to consider handing the keys back to the lender in a deed-in-lieu foreclosure. In a deed-in-lieu of foreclosure, you transfer title to the lender rather than stop making payments on the loan and forcing the lender to foreclose.

However, when it comes to investment properties, in many states, the lender has the right to demand that you pay the difference between what you and the bank receive from the sale of the property and the amount you owe. The lender can even sue you to recover that difference and obtain a deficiency judgment against you.

In addition, a short sale will hurt your credit score as much as 100 to 200 points. But in three to five years, your credit will improve. It’s obviously not the best choice and not what you’d want to do, but in terms of your credit, a short sale is better than a foreclosure. Most lenders believe a deed-in-lieu is between a short sale and a foreclosure.

I’m sorry that there aren’t any good options. Please consult with a real estate attorney who can advise you on the various laws regarding mortgages and foreclosures in the states in which your rental properties are located and the risks associated with any of these choices.

For more articles on short sales in real estate and deficiency judgments, read our other articles on these issues:

Can’t Pay Mortgage? Homeowner Worries About Deficiency Judgment

Foreclosure Of Home After Divorce And the Possibility Of A Deficiency Judgment

Foreclosure or Short Sale: Which Is Better And Can The Lender Get A Deficiency Judgment?

Short Sale In Real Estate Can Lead To A Mess

Short Sale May Not Be The Answer To Your Money And Income Problems