What should I do?

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?

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  1. I wish I knew.

    You could always sell and buy up apartments in my area. Saw a 3 family selling for 89,900 the other day.

  2. Funny thing is, not more than a few hours after I made this post, I read an article in an old edition of MAKE about a Unix admin / Perl hacker who l lived in NYC making crap loads of money and paying $3,200 a month for rent. He decided he was sick of the IT industry and needed a change, so he moved to New Mexico where he bought a house in the desert for $70k and started doing what he loved: tinkering with things and being creative, on his own time.

    Over this Labor Day weekend, I’ve made the decision to get rid of all of my houses, even if that means going bankrupt.