Making the most out of the sale of an underwater investment property can be difficult, especially in a competitive housing market. Here’s how to get started.

Q: I bought a home as an investment for $450,000 with several partners back in 2006. We intended to buy it, knock it down and redevelop the property. That didn’t happen.

The home is now a rental. We’ve been trying to sell it for years and it’s been on and off the market. A couple of months ago, I had an appraisal done and the valuation came in at around half of what we paid for it. There are two mortgages on the home totaling about $375,000.

We’d like to sell the home and ask the lenders to let us pay the shortage over time. Is there a mechanism to do this? I’d like to retire and have a pension but most of my assets are in retirement accounts.

A: It would be great if everyone lived in San Francisco, where home prices have skyrocketed over the past decade. Or, Denver. The truth is, there are a whole bunch of places where properties are worth less than a decade ago.

We recently saw a chart (on showing the changes in home prices from 2007 to 2017. The chart reflected median home values, and what shocked us is the number of states in which the median home value was actually lower in 2017 compared to 2007.

While some states have done very well, your question got us thinking about how many people are still underwater (or are functionally underwater, meaning that if you factor in closing costs they owe more than the property is worth) in their home or investment properties.

You purchased your property about 12 years ago and the value of the property appears to be half of what it was when you purchased it. That means you’re underwater with your loans and would need to bring cash to the closing. If the lenders approve a short sale (even trickier than normal, because you have two lenders instead of one), they would agree to accept whatever price the property sold for, and you would be off the hook. But, you would damage your credit with a short sale, and the part of the loan that is forgiven would be treated as income by the IRS.

During the Great Recession, lenders weren’t initially willing to help homeowners when they were underwater. They did even less (initially) for real estate investors. Certain government programs (like Making Home Affordable) provided assistance on a limited basis to a relatively small number of homeowners, but a large number lost their homes to foreclosure or short sales.

You and your partners have been carrying this property now for 12 years. One bright spot in the real estate market over the last couple of years has been the rental market. You indicated that your property is rented and we don’t know if it’s a single family or multi-family property, but we wonder how you’re making out on the income you receive relative to the expenses you incur on a monthly basis. If you’re doing okay and covering expenses, then perhaps one of your fellow investors might be willing to take over your share of the property in exchange for taking on the debt.

You can also approach your lenders and see if they are receptive to a short sale. That is to say, the lenders would allow you to sell the property and allow the buyer to get title to the property free of the lender’s lien and your lender would retain the right to collect money from you on the debt you owe for years to come.

We’ve heard of lenders doing exactly what you are requesting, but it tends to work best when the property is worth much less than the loans owed. Here’s the thing: You could probably get enough cash to pay off one of your lenders, but the second lender would get little or nothing for the sale. The second lender might be willing to release the lien and allow the sale in exchange for an arrangement for you to pay money going forward, but that lender may request replacement collateral to secure the obligation.

In other words, that second lender might require you and your partners to attach a lien against your primary residences for whatever amount is unpaid on the day you close.

Before you make any calls (and put the lenders on notice that you might default – which is how they’ll take that call), talk with your tax preparer or accountant to see what your options look like financially. You may not show a profit on the sale, but depending on the depreciation, the effect of the sale could substantially alter your tax return.

Then, talk with a real estate attorney about the intricacies of selling the property, and to help you understand the expenses of the sale and to determine where you’ll end up after the sale from a cash perspective. If you and your partners can’t pay off both lenders, you may need to explore bankruptcy protection. You should also ask what happens if you can’t sell and can’t continue to make payments to the lender under the current arrangement.

Finally, talk to some knowledgeable real estate agents or brokers in the area about what other properties have been selling and what price they think they could realistically get for your property.

Once you have all that knowledge in hand, then you can decide whether it makes sense to call the lenders.

Good luck.