Real Estate

I haven’t explained what’s been happening with my properties over the past few months, mostly because I haven’t been sure of what I wanted to say about them. A few months ago I listed two of my properties (Ware St and Bowers St) on CraigsList for $315k and I have been dropping the price ever since (as far down as $289k). A few nibbles, but no bites.

The past few months it has come to the point where I simply haven’t been able to afford them. I transitioned from a consultant to an employee at Aerva in July, which meant I now receive $800 less every month due to taxes. The two properties have an adjustable, sub-prime, rate, and one of them recently adjusted — the new payment is $500 more per month. So a few months ago, I stopped paying the mortgages on two of my properties. I told myself, “What was the worst that could happen? The banks foreclose on the houses and my credit is hurt.” But my credit is already screwed (under 550 credit score due to a couple of late house and credit card payments) so I’m not too concerned about that. The problem is if the banks foreclose on the houses, they may still try to come after me for the money I owed, upwards of $600k between the two mortgages. This debt would most likely haunt me forever, even 10 – 15 years down the road.

I already submitted my financial statement and a forbearance letter to one of the banks a few weeks ago. They called me Thursday evening and told me they can’t do anything about my monthly payment and that my best solution is to try and sell the house, even if I have to sell it for less than what I owe. This is known as a Discounted Payoff, which means the bank may accept a sale of the house, including closing costs, and forgive the rest of what I owe. This would be great because I would get rid of the houses and not have to worry about any debt associated with the properties. The standard procedure all of the banks follow is that I need to find a buyer, and fax the mortgage company a buyer pre-qualification letter, along with a HUD 1 or Net Sheet (which shows where all the money is going), and the Purchase and Sale agreement. The bank will review the information and decide whether or not to accept the sale.

So that’s what I’m going to do with Ware St and Bowers St. Next week I will list them with Paul Brouillette from Century 21 for whatever price he says will make the property sell fast, which will no doubt be much less than what I owe (probably $20-$30k less). He is the one I originally bought the properties through a few years ago and I have developed a good relationship with him. Listing the houses with Paul means he will do all the work, but he will also get his $20k commission, hopefully paid by the bank. If the banks don’t accept any offers that come through, they will have no choice but to foreclose on the properties. And if they foreclose and tell me I still owe them lots of money, I will have no choice but to file for bankruptcy.

So by now you might be wondering what I’m referring to by asking “What should I do?”. If you’ve been following, you probably noticed I’ve only been talking about two of my three properties. The third property is the first property I purchased, Cumberland Rd, in 2003 for $213k. As much as I hate to admit it, I do have an emotional attachment to the property. I lived in the renovated studio apartment of this property for several years, built my first 16′x12′ shed in the back yard, I spent countless weeks carrying out dirt from the basement to increase the height of the basement, and then many more weeks pouring concrete forms. I’ve put a lot of thought and planning into what can be done to make the property better and it’s definitely the nicest of my three properties. But, I also owe $352,000 on the property (refinanced many times to pay for purchasing the other investment properties and for upgrades in the property). Luckily I have a fixed rate that will never go higher than 6% for the life of the loan, which means my monthly payment, barring any major increases in taxes or insurance, won’t be higher than $2,700 a month. I currently have three units which can be rented, and if the basement is finished and rented I can be bringing in about $3,000 a month. Of course, I still have to deal with everything involved in owning a rental property, the very thing I’m trying to remove from my life by getting rid of my other two properties.

So the question is, what should I do? Should I get rid of Cumberland Rd as well? It’s nice to have a fixed rate, but who cares about the fixed rate when I still have to worry about vacancies, property maintenance, collecting rent, and all the other responsibilities attached to owning a multi-family rental property? I will continue to dread every phone call I receive, fearing it’s a property disaster. However getting rid of Cumberland Rd means I’ll have to hope for a similar discounted payoff being accepted by the bank. I owe $352k on the property and in this market, I doubt the property would sell for more than $270k, an $80k difference. Will the bank simply forgive $80k? Unlikely. This means getting rid of Cumberland Rd increases the likelihood of me needing to file for bankruptcy. However there is one upside to bankruptcy: all of my credit card debt ($27k) would be wiped away.

If I could see the real estate market making a sharp upturn sometime over the next few years, I could understand why keeping Cumberland Rd makes sense. But I don’t see that happening and honestly, I don’t want to live the next five years of my life knowing I have a $350k piece of debt, which requires constant maintenance, riding on my shoulders. I would rather wipe the slate clean and start fresh.

As you can see, my mind is already more or less made up. This weekend I’m going camping and on the 2 1/2 hour ride up North, I plan to spend lots of time thinking about this decision. I suppose I just need to convince myself that it’s the right move. Its a big decision and a major turning point for my financial life.

What do you think? What would you do in my situation?

This is the letter I wrote to Wilshire Credit Corporation’s Forbearance Department, regarding my mortgage with them for my Ware ST property. I’m currently two months past due and the interest rate just adjusted from 8.25% to 11.5%. My monthly payment went from $2,450 to $3,000 per month. The property currently brings in about $1600 in rents every month. This letter is apart of an envelope of documents, including a personal financial statement, last two months bank statements for all my bank accounts, last two years tax returns, and W-2′s.

I’ll be sending a slightly modified version of this same letter to IndyMac Bank, who holds the mortgage for my Bowers ST property.

To Whom It May Concern:

Several years ago I started investing in real estate with the intention of renting multi-family properties for long-term investment. I bought my first property in 2003 (Cumberland RD, my primary residence) at the age of 21. Since this was my first property, I was not experienced with being a landlord and I had to learn a lot on my own. My first tenant, George Demasse, was a good tenant for the first year – but then he started having drug problems and stopped paying his rent entirely. Eventually I went through all the legal processes to have him evicted. In the end, he cost me over $15,000 in lost rent and legal fees.

In 2004 I bought another property (3 family on Bowers ST) which was fully rented. Only 3 months after purchasing the property, all three of the tenants moved out. I was required to spend considerable amounts of time and money cleaning and preparing the units for new tenants. By early December 2004, I had 3 tenants that were ready to move in. Only one week before they were supposed to move in, a water pipe on the third floor froze and flooded both of the units below it. An insurance adjuster came by, and after explaining my situation to him, he told me to get all the work done – he said not to wait and that the insurance company would cover everything. A week later, after spending over $17,000, I received a call from the insurance adjuster telling me my policy doesn’t cover for broken water pipes and that I’m fully responsible for paying the contractors. I spent over a year with the Insurance Complaint Department fighting my case, but they eventually sided with the Insurance Company.

In 2005, I bought my third investment property (4 family on Ware ST) fully rented. A few weeks after purchasing the property, one of the tenants moved out and I needed to spend about $8,000 renovating the unit before it could be rented (it was in bad shape). The following year, another tenant in the same building had drug problems with the police and the building inspector was called in. He demanded I evict the tenant and do not rent that unit until it had been renovated and had an occupancy permit pulled. This required over $10,000 in work. During that winter, I had several other issues with leaky water pipes and a couple of times the water pipes started to freeze. There were many times when I had to leave work in the middle of the day to use a hair dryer on the water pipes; I was afraid they would freeze and cause the damage and expense I experienced in 2004 with Bowers ST. The following summer, the gas company went into the basement to change the gas meters and noticed the two furnaces in the basement were in very bad shape. They refused to turn the gas back on until the gas furnaces were to code. A heating company came by to give me advice on the condition of the furnaces. They told me they were beyond repair and needed to be replaced. So during the fall of 2006 I spent about $12,000 replacing two gas furnaces and having new duct work installed. Since I didn’t want to go through the issues with the water pipes again, I also had the plumber redo all the water pipes in the basement. At this time, one of the units became vacant and I was required to spend and additional $8,500 renovating it (new carpets and kitchen/bathroom floors, three new windows, new kitchen sink & counter, new paint throughout, new bathroom fixtures).

It’s been 10 months since the new furnaces were installed in Ware ST and I still owe the plumber over $4,000. He has threatened to sue me, so I’m making $100 a month payments to him. I’ve already exhausted all the credit on my credit cards to help pay for many of the renovations in the rental units. I was unable to pay my American Express payments for several months and in July I made a couple of payments. Now I’m two months behind again. I’ve also had to sell all the stocks I owned to help cover bills related to the properties.

Over the past few years, being mostly self-employed (I do freelance technical consulting), I’ve struggled to maintain a steady income and maintain the properties at the same time. In April of 2006 I started working part-time at a software startup company in Cambridge, MA called Aerva. It was a very good opportunity, however being a startup, they have had to be very tight with money and have been unable to pay me market rate since I began there. As of July 1st, 2007, I started working at Aerva full time as a W-2 employee.

My tax returns are done by a CPA. I have included the 2005 tax return with this letter. I have filed for an extension for 2006’s tax return, and I have included the extension with this letter.

I have two checking accounts, however I only use the TDBanknorth account. I also have two Savings accounts (INGDirect and ETRADE), however I don’t use either of them (since I don’t have any money to save!). I have included the latest two months statements from all accounts as requested.

I do not have a vehicle in my name, but I use my family’s business vehicle and simply pay for insurance, gas, and maintenance.

Because of the condition many of my rental units are in, I must rent them for a discount. The properties are also not located in desirable locations, so renting them is more difficult. It’s also very difficult to find tenants who will actually pay every month and who won’t destroy the units. The taxes and insurance have increased on all of my properties since I bought them, which has increased my monthly expense. Many vacancies, bad tenants, and expensive property repairs over the past few years have drained me of any backup funding I had saved.

The recent rate adjustment on the Ware ST mortgage with Wilshire has increased my monthly payment by $500. I was already having trouble making payments!

If my monthly payment cannot come down to $1800 a month including tax and insurance ($1300 a month principle and interest), I will be forced to request a discounted payoff and try to sell the property at a huge loss. About a year ago, I attempted to sell the property for $305,000. It wouldn’t move at all and there was very little interest, so after 9 months on the market, I took it off. If this property is listed for $240,000, I believe it would move very quickly. If I do end up having to go the discounted payoff route, I can get you a proposed listing agreement and estimate of closing costs.

If you have any other questions, please feel free to call me directly anytime.

I await your response,

Thank you,
Raam Dev