Is there help out there for landlords who want to avoid foreclosure?

July 12, 2009 2:16 PM

I'm a landlord who's completely underwater in her mortgage, has a job but just received a pay cut, and has tenants but the rent doesn't cover the mortgage payment. Can I get help even though it's no longer my primary residence? Or will I have to become another statistic and go into foreclosure?

I became a reluctant landlord when I had to move out of the state for my new job and wasn't able to sell my house. I found tenants and have been renting the property for a year and a half, but the rent is $800 less than my mortgage payment. I'm charging as much rent as the market in that area (northern VA) will bear. The house is worth half as much as I paid for it in 2006, and I'm underwater in my mortgage by about $150,000. I have not purchased another house, and am currently a renter myself.

I have a good job, but my entire company just went through mandatory pay cuts to try and survive. I've racked up quite a a lot of debt (other than the house) trying to survive myself. It's gotten to the point where I just can't afford trying to hold on to that house anymore. If I could at least get my mortgage payment to be as much as the rent that's coming in, I could probably hold on. But since I'm labeled as an "investor", not a primary residence homeowner, I can't get my lender (or anyone else that I've found) to even listen to my predicament.

I want to do the right thing, especially when it comes to the tenants (I have no desire to screw them over). I don't really want to add to the housing market disaster by adding another foreclosed property, but I may not have a choice. It's a huge amount of debt that I'm not sure I should risk trying to hold on to. Is there any hope or help out there for someone like me? Are there any companies that can help me renegotiate the terms of my mortgage, even though I don't live in my house anymore?

posted by karmagirl to work & money (16 answers total)

I don't really want to add to the housing market disaster by adding another foreclosed property, but I may not have a choice.

At this stage you've got to fight for yourself. I am the opposite of an expert in this area but the best way out for you may be a deed-in-lieu of foreclosure.
posted by @troy at 2:30 PM on July 12, 2009

Legally I have no idea on this but looking from the outside in to me it seems that you are up to your neck in debt. Now I don't know if foreclosure means that you have to pay the remainder of the debt off (I'm in the UK) but I would say the best thing might be to say to the renter "This is the situation. You need to either move out or I need to increase your rent by $800/mo". I guess they wouldn't do that but they might say to agree to $400/mo increase depending on the area etc.

As @troy said you need to put yourself first but I would suggest send a registered letter to your lender to explain and start setting up a paper trail. IT will at least show you tried to address you debt issues which can be a god send if it goes legal / you enter into negotiations with your creditors
posted by rus at 2:40 PM on July 12, 2009

2 things: (1) Would you consider moving into your own property? I don't know the details, or whether it's plausible considering your current leases, or if it's totally not an option due to other various reasons.

(2) Have you put the property on the market yet? If somebody can come in and purchase the property, even at a loss, you will be in better shape.
posted by jabberjaw at 2:43 PM on July 12, 2009

I don't know if foreclosure means that you have to pay the remainder of the debt off

Virginia is a non-recourse state so if the poster hasn't refinanced she ~should~ be not on the hook for this money.

It looks like the poster does not quite qualify for the new tax forgiveness option, which requires two years as a principle residence. There may be some wiggle room here, such as fudging the dates a month or two or evicting the renters and technically moving back in to get the full two years, but this is not something a third party like me can advise from a distance and without actual experience in this legal area.

AFAICT, there isn't much self-help available here unfortunately.
posted by @troy at 2:52 PM on July 12, 2009

I know you can't get what you need by selling, but could you talk to anyone (like a realtor or lawyer) about asking the renters about a rent to own situation or asking them if they will buy the house outright. You would take a loss, but you could get it off your hands. Again, IANAL or real estate professional. My current landlord recently asked my partner and I if we wanted to buy the condo we live in (I think because he owns lots of rental properties and over mortgaged himself), but we aren't able to. It'd be worth a try, though.
posted by ishotjr at 2:53 PM on July 12, 2009 [1 favorite]

Can you split the residence (eg: basement suite + main floor?) and rent them seperately?
posted by blue_beetle at 2:53 PM on July 12, 2009

I was incorrect about the tax forgiveness angle. My link above states: "cancellation of debt income is not taxable in the case of non-recourse loans" so that's one less worry most likely, assuming the loan hasn't been refi'd.
posted by @troy at 2:56 PM on July 12, 2009

Thanks for the input so far...

(@troy) I looked up the deed-in-lieu option, but apparently that requires the property to have a value that's equal to the amount owed, which isn't the case in my situation.

(rus) I have considered contacting the tenants about increasing the rent, but rates in that area have actually gone down. Perhaps they might bite if the only other option was being evicted, but there are so many other options for renting - even in the same neighborhood! I think your idea about a paper trail is a good one, although I think I'll try to seek some legal advice first.

(jabberjaw) Unfortunately moving back in isn't an option, since my current job (in SC) is the only thing keeping me afloat and it isn't a job I can do from another location (like VA, where my property is). I haven't put it on the market yet, partly because the tenants still have a lease and partly because the neighborhood is so saturated with foreclosures already and none of them are selling.

I really appreciate your comments! This is a tough situation and I know there are no easy answers...
posted by karmagirl at 2:57 PM on July 12, 2009

Realistically, how long is it likely to be before you default on your mortgage or other debts? Sometimes you're better off taking the pain as early as possible rather than getting more in debt in the hope that things will "get better soon". I'd recommend talking to a financial counsellor about your options before you decide on a course of action. You're not obligated to follow their advice, but at least you'll have clear information about the possibilities open to you.
posted by Lolie at 2:59 PM on July 12, 2009 [1 favorite]

When you looked up the deed-in-lieu option, did you actually talk to your lender or just cruise their website/some other website?

I realize that some creditors (particularly those with unsecured debts) are getting nasty about collecting what they feel is due to them but some lenders understand that this economy sucks and that the only way we'll get through is to help each other out.

If I were in your position, I'd call my lender and ask first for a deed-in-lieu that completely absolves me of all the debt on the mortgage. If that is refused, I'd ask the tenants whether they'd want to purchase the house; if they do, then you could negotiate with the lender to do a short-sale: a sale that pays the mortgage off at a lower balance than what is actually due. If the tenants want to buy the house but can't get financing, then that's a different matter and might require a different negotiation with the lender (i.e., the lender allows the tenants to assume your mortgage - sucks for them, though: they'd then be underwater the $150,000). Lastly, if nothing else is panning out, I'd ask my lender for a work-out program: a schedule of payments that is currently lower than your normal payment (perhaps this is an option until you can find a buyer).

I used to do foreclosures in Florida, back before law school. Even when the economy is decent, lenders would rather not have a foreclosed home in its property inventory. Most lenders will work with the owner to determine a different route.
posted by LOLAttorney2009 at 3:10 PM on July 12, 2009 [1 favorite]

(LOLAttorney2009) I just googled deed-in-lieu and read the Wikipedia entry, where it said: "In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred." I will definitely keep that option on my list and will talk to my lender about it. Thanks for all the info!!
posted by karmagirl at 3:22 PM on July 12, 2009

"Secured by" but not necessarily equal in value to the mortgage.

What that sentence really means is that if you own two properties and Property A has a mortgage on it, you can't offer Property B under a deed-in-lieu of foreclosure. When I was doing foreclosures, we handled deeds-in-lieu that were upside down on value all the time. DILs are cheaper, in the long run, than foreclosure proceedings - there's just the cost of recording the DIL and then hiring a property manager/Realtor to dispose of the property. With foreclosure, the property is usually damaged by the outgoing owner/tenant plus there's court costs and sheriff's fees... ick. Lots of costs there. Lenders might hate DILs but they prefer them over foreclosures. (IME, YMMV).
posted by LOLAttorney2009 at 5:16 PM on July 12, 2009

Anecdotal advice (use with caution):

A friend of mine was having significant trouble paying his mortgage, but the bank would not even consider refinancing because he had been making all of his payments. He eventually decided to underpay a few times. Very soon after he stopped paying the full mortgage (he might have stopped paying all-together) the bank had a rather predictable change of heart and negotiated a lower mortgage payment with him.

The lesson that I took from this is that while you are making the payments the lender has absolutely no reason to negotiate with you. The lender is getting exactly what it wants: prompt payment in full. But, once it becomes obvious that they will lose the mortgage if they don't negotiate with you, they become much more helpful. You have to be remind them that they have something to lose, too.
posted by oddman at 8:46 PM on July 12, 2009

What your lender will take ... is what your lender will take. Do not reject deed-in-lieu as an option because you think your lender will. Ask them. Asking isn't a commitment, either.

Many, many lenders are taking the easy way out. They have more foreclosures on their desks than they can deal with. Something like a deed-in-lieu saves them money. And in fact, one of the newest wrinkles is lenders walking away, because taking possession of the property is just too expensive.

I am a landlord. Don't worry about screwing over your renters. They will be able to stay up until the sheriff's sale if the property goes all the way through foreclosure. If you keep them informed, that's plenty of time. In terms of options, they have many -- in most larger cities rents are stable or falling. They may be able to get more house for their money if they go looking now. Your renters will be OK.

It's even possible that if you go with a short sale, the new landlord will assume the balance of their lease.

Are there any companies that can help me renegotiate the terms of my mortgage, even though I don't live in my house anymore?

Real estate attorney is the best bet here. No, you are pretty much ineligible for any non-profit assistance, and that means an attorney or a private mortgage broker. There are fraud and regulation issues with the latter, but if you find someone you're comfortable with it could work. Ultimately they will only do what you could do yourself, but if you're distant from the property or too busy with work, an agent or broker may be a lifesaver.

I don't really want to add to the housing market disaster by adding another foreclosed property

Too late. Your situation is what it is. Run the numbers -- and for you, they don't look so good. You can't even use Chapter 13 because you won't be able to make the mortgage payments. I would say try for a deal with the bank and/or a preforeclosure distress sale. The sooner you get out from under this burden the easier it will be on you.
posted by dhartung at 10:03 PM on July 12, 2009

You can't even use Chapter 13 because you won't be able to make the mortgage payments.

This may not necessarily be true. It's worth talking to a bankruptcy professional as there may be options* to alter the terms of the mortgage in bankruptcy court.

IANYL, obviously. I am suggesting you get legal advice tailored to your situation and your jurisdiction and to not consider that your options are, uh, foreclosed without exploring them.

*It's not the OP's primary residence and thus is not exempted from the 'no cramdown' rule.
posted by norm at 9:20 AM on July 13, 2009

My thought of putting the rental property on the market was to consider the option of a short sale, as what LOLAttorney2009 suggested, but with a buyer other than the tenants. Best of luck.
posted by jabberjaw at 12:33 PM on July 13, 2009