Foreclosure vs Shortsale of an investment 4-plex


Posted by Adam on September 26, 2007 at 17:42:05:

I purchased a 4-plex approximately 12 months ago. The building is an investment property and is fully rented. Unfortunately the rents do not cover all of the expenses of the property. I purchased the building because it was a good deal and had a substantial amount of equity trapped in it. I was in a hurry to acquire the property and bought it under less than ideal financing terms under the assumption that I could flip it 6-12 months later and make a healthy profit. In the mean time I figured I could subsidize the monthly loss on the property and that it would all be worth it in the long run.

Well, shortly after I purchased the building the market started to get soft, and then the lending crisis ensued. Consequently any equity I had in the beginning is gone now and I am stuck bleeding money to this thing on a monthly basis. To make things worse the “verified expenses” or utilities that my realtor showed me up front turned out to be Way lower than reality. I got into the building thinking that it would cost me about $200-$300 a month. Realistically it costs me closer $500-$1,000.

I am a mortgage broker and the lending crisis has not only affected my rental property but has seriously diminished my income as well. With barely enough money to pay my own personal bills I can no longer afford to subsidize the 4-plex. I’ve had it on the market w/ a realtor now for about 3 months but with the market the way it is I have really no hopes of selling it for what I need to get out from under the mortgage and pay realtor fees as well.

I contacted the bank that holds my 20% second lien note the other day (I have an 80/20 loan) and informed them of my situation. They said they would send me a work-out package which I have yet to receive. I’m in a position though where I’m not sure whether it is worth attempting a short sale. I understand that if I succeed in a SS I will be liable for taxes on the difference between the existing liens & the sales price. This could easily be thousands, if not tens of thousands, of dollars. I owe $450K on the property and in today’s market it would probably sell for $375-$400K. Which leaves me paying taxes on an additional $50-$75K this year. That could easy add up to a $20,000 tax bill which would be even more devastating. I guess my question is what are the advantages/disadvantages of a foreclosure vs a short sale?

I currently have impeccable credit, and I will be sorry to destroy it, but I feel as if I have no choice. I understand that the SS will have less of an effect on the credit, but with the additional tax consequences is it worth it?

Also, if I have to go into foreclosure, how does this affect my tenants? Do I need to evict them prior to foreclosure to avoid opening myself up to lawsuits from the tenants?

Thank you in advance for your input.


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