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Fight or Flight? Hold or Fold? Hang on or Sell?

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Real Estate Agent with Alain Pinel BRE 01367196

Fight or Flight? Hold or Fold? Hang on or Sell?

In the heady years when real estate properties appreciated in highly accelerated rates, sometimes in double-digits, people were enticed to join the band wagon and buy real estate. The hope was that real estate will continue to appreciate; and in terms of residential income properties, for the landlords to see positive cash flow.

However, those dreams faded...heck, they burst when the economy tanked and real estate values fell into an abyss. Many investors are now grappling with what is right for them, as well as what is the right thing to do.

Borrowing includes promise to pay

When investors borrow money, whether from banks or from private individuals, they promise to repay that loan. It isn’t just a business decision but it’s also a moral dilemma. What do you think? Vote here.

But when expenses soar, and incomes flatten, what should investors do?

Unlike stocks, real estate property is brick and mortar. And unlike stocks, rental properties still generate some income. And if the properties result in losses, according to Smart Money and the article titled “So you want to be a landlord?” there are some things one can write off:

“...deduct mortgage interest and real estate taxes on rental properties. If you pay mortgage points, you must amortize them over the term of the loan (unlike points on a mortgage to purchase a principal residence, which can be deducted immediately). You can also write off all other operating expenses -- like utilities, insurance, homeowner association fees, repairs and maintenance, yard care and so forth.”


What if the pain become unbearable?

However, there comes a point when the pain of ownership may be too much to bear, as in the increasing cost of repairs with no relief from increased rents. If the decision is made to cut one’s losses, then it becomes a choice of walking away/strategic default or short sale.

Ramifications

It isn’t just about the effect on one’s credit scores or the tax consequences. But one should factor what happens next.

  • After a short sale, investors will receive 1099s showing that the difference of what is still owed on the property and what it sells for is taxable income. Since this is not a principal residence, it will not qualify for Mortgage Debt Forgiveness Act
  • Of major concern: will the investor be slammed with a deficiency judgment after a foreclosure or short sale?


Walk away/strategic default or short sale? Choose wisely.


Comments(21)

Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Carolyn -- yep, I was amazed/dismayed too. Looks like ethical/moral standards have dipped.

Jul 19, 2012 04:44 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Pacita - People in this position have a lot of thinking to do and many different points they should consider.

Jul 19, 2012 04:50 PM
Tom Arstingstall, General Contractor, Dry Rot, Water Damage Sacramento, El Dorado County - (916) 765-5366
Dry Rot and Water Damage www.tromlerconstruction.com Mobile - 916-765-5366 - Placerville, CA
General Contractor, Dry Rot and Water Damage

This has got to be a tough decision to make Pacita, but it is one that many are having to make.

Jul 19, 2012 05:12 PM
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Pacita, there is less of a stigma to walking away from a mortgage, especially with investors. 

Jul 19, 2012 05:44 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Christine -- walking away isn't as easy as some people think it is once they factor in the other possible outcome and consequences

Tom --- the trouble is, people forget that real estate investing, unless one is a flipper, is a long-term investment, unlike stock traiding.

Pamela -- perhaps strategic defualt doesn't have the stigma...but one's personal beliefs and principles may still come to play in the decision-making process.

Jul 19, 2012 06:52 PM
David Popoff
DMK Real Estate - Darien, CT
RealtorĀ®,SRS, Green ~ Fairfield County, Ct

Get professional advice, talk with an attorney and your accountant. Times are hard right now, lets hope the economy and job market improves.

Jul 19, 2012 08:25 PM
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Real Estate Agents - Luxury - Divorce

No one can kick themselves for making the best decision at the time...times change and we have a whole new set of decisions...and laws...hopefully that will be extended and watch to protect the people who need it most.

Jul 19, 2012 09:30 PM
John McCormack, CRS
Albuquerque Homes Realty - Albuquerque, NM
Honesty, Integrity, Results, Experienced. HIRE Me!

We make financial choices and we deal with the consequences.  I work with many investors and have seen both the up and down side of investing especially in out of state situations.  One would be wise to work with a knowledgeable Realtor® and keep in mind none of us have a crystal ball what tomorrow may bring. 

Jul 19, 2012 11:49 PM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

There is not enough personal responsibility.  If real estate investments work out well, it was absolutley the responsibility of the investor.  When things go wrong, it is the economy or the banks to blame.  I fear our society is doomed to learn nothing from this mess.

Jul 19, 2012 11:53 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

David --- the professionals one should consult starts with a real estate attorney and an accountant

Sally and David --- investing is like gambling. Sometimes you lose, sometimes you win. Whatever the outcome, ultimately the investor is accountable.

John ---  at the time when real estate values were high, realtors found investment properties not only for their clients but for themselves. The question should be, were the investors in it for the long haul?

Chris Ann --- someone told me that when it comes to investing in the stock market, one should have a very strong stomach for it. the same can be said for investing in real estate. I know of someone who over-leveraged real estate properties and lost all.

 

Jul 20, 2012 03:35 AM
Michael Blue
Home Smart Realty West - Encinitas, CA
REALTOR - 760-889-8877, Encinitas/Carlsbad

A stratigic default short sale was and is made possible by certain lenders at certain times.  I will add, remember there is always another side to any situation.  Being able to make the over priced payment vs the next door neighbor that gets out from under the burden because of a hardship.  Making the $550,000 payment on a upsidedown home worth $325,000 is considered a hardship compared to the homeowner short selling and lets not forget the possibility of getting up to $40,000 cash and a deficiency waiver too from some lenders when invited.  Let's not judge so quickly.

Jul 20, 2012 02:12 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Michael

Every one's situation is different. Just like people's views will be different. Some will always call it a business decision. But for some, it's a moral dilemma especially if the defaulting party has the means but just doesn't want to continue and therefore taking what others will see as an easy way out.

I'd rather pursue a short sale in many cases. Not only does one need to prove hardship, the bank's own BPO can also show the property's reduced value to help justify the sale.

Jul 20, 2012 02:22 PM
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

Pacita,  I'm sure you know an attorney or accountant should be advising that client.

Can the owner move into one of the small units and rent their primary residence (or sell it?) to reduce their overhead?

How far underwater are we talking about?  If not too far underwater and if the property is in the east bay, I'd hold onto the property.  With rents increasing rapidly and low interest rates for a possible re-fi? (talk to the lender for special consideration?) the property may be well worth some pain.  We could see very high rates of inflation in a few years which could push rents and prices up.  

If the property is tremendously underwater, I'd probably walk and hope there's no deficiency judgement. And bite the bullet on the taxes for debt forgiveness?   How much in taxes are you talking about?

Oh yeah, great picture.

Jul 20, 2012 03:03 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Lloyd

Property owners want to walk...they've been advised to try short sale first. Trouble is, they have the means to continue paying the mortgages on their properties. They are just tired of the numerous repairs that are resulting in negative cash flow. They owe more on the properties that what they're worth. So they're talking with a broker who is experienced with short sale, and will also consult a real estate attorney to prevent/avoid deficiency judgment.

They think they're thinking long term (costs of maintaining the property) so they want to cut their losses.  But maybe they're short-sighted especially now that the market is rebounding and rents are going up.

Jul 20, 2012 03:14 PM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Pacita, you have laid everything out for an investor to make a decision. We have a rental property where we are upside down but we have made the decision to stay the course even though there was money out of our pocket every month. We were just able to refinance the first mortgage under HARP which saves us about $200 a month, so we are almost breaking even. There is light at the end of the tunnel!

Jul 20, 2012 10:28 PM
Diana Zaccaro Broker Associate
ZOOM Realty Group - Cocoa Beach, FL
"The Accidental Blogger" Cocoa Beach, Florida

Pacita, this is a very timely post and your response above in #15 almost perfectly describes the situation of an investor I have been working with for months. He can afford the payments but is underwater and losing money every month and just tired of dealing with it. Part of him wants to do the right thing and part of him wants to walk away so I have him consulting his CPA and tax/real esate attorney about the risks and benefits of each scenario. We will then make an informed decision on how to proceed.

Suggested!

 

 

Jul 21, 2012 06:02 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Frank and Sharon --- glad you got your place refinanced. Problem with these investors is that their property can't be refinanced because roof needs to be replaced and they don't have enough equity

Diana --- people need to know there are ramifications either way. It's a matter of seeing which would hurt the least. Hang in there until market improves, or get out now and pay the consequences.

Jul 21, 2012 06:20 AM
Endre Barath, Jr.
Berkshire Hathaway HomeServices California Properties - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Pacita it is sad or should I say tragic that these questions have to be debated and decided on. Hard to believe that we help all over the world with Billions of Dollars that we give away and we can not help our own.....BTW I loved the picture illustrating your question. I am advising to "hang in there" the market always returns....

Jul 21, 2012 07:57 AM
EMILIA B COOPER, REALTORĀ® SFR.NCHSE.AHWD
LAROSA REALTY - Orlando, FL
Short Sales, Foreclosure & Bank Owned Real Estate

Pacita very informative post, and sometimes I get frustrated when I tell them to talk with an attorney and your accountant, and then yet they do not listen to advisers and loses their home. Pacita Thank you!

Jul 21, 2012 12:08 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Endre -- so many of us never thought we'd be facing this dilemma since we've always seen (and hoped) that real estate values were for the most part, an asset that appreciates. Alas, we now know that not to be true. Location location location didn't help us at all.

Emilia -- thanks. Too many unknowns to make a rash decision to bail.

Jul 21, 2012 03:26 PM