Real estate losses force quick resolution

DEAR BENNY: I am a retired teacher on a fixed income, with a home in California, a small 401(k) and an even smaller Roth IRA. I bought two very good new houses in 2005 with nothing down at a 10 percent market discount. I have a first loan and a second loan on each house. Since then, the rents have dropped dramatically and both houses are now empty.

This summer I will lose $12,000 on both houses, and renting them will add up to an $800 loss per month. I can no longer throw money away on these investments. If I go into foreclosure, what can happen to me besides my first-ever bad credit rating and an IRS bill for the difference in foreclosure price vs. loan amount? --V.K.

DEAR V.K.: Because you are an investor, you will not be able to take advantage of the many federal and state programs designed to protect residential homeowners.

You have a number of options, but because you have a first and second mortgage on both properties this will require both lenders to cooperate, which is not always possible.

You can try to arrange a short sale. Under this approach, you (or your real estate agent) will find a buyer and then negotiations will have to be worked out with the lender(s) as to what price they will accept below your existing loan balances. Short sales take a lot of time and patience, and once again, the existence of the second mortgage will make this difficult.

You can ask the lender to take back the deed and cancel the mortgage. But once again, your second mortgage must be either paid off or canceled.

You can declare bankruptcy, seeking a reorganization under Chapter 13. This will allow you to work out a plan with your creditors over a period of years. I am not a bankruptcy attorney, and you should consult with such a lawyer to get more information.

And finally, you can let the properties go to foreclosure. As you suggested, this will impact on your good credit rating, but more importantly, any cancellation of your debt may be taxed as ordinary income. There are some exceptions, and you must consult a financial adviser for specific information.

DEAR BENNY: I recently inherited a condominium from a relative. I'm finding that the homeowners association (HOA) does things very differently than my own HOA. The president modifies the "common areas" of her own unit by adding skylights, changing the front door, hanging window boxes, planting her own plants, and displaying personal items in the common walkways, including an electric light to illuminate her entryway. She plants trees and has other trees removed, according to the view she wants from her own windows. She hired the property management company from her prior residence, and some of us question their exact relationship.

During a recent plumbing inspection, she or the vice president accompanied the plumbers into each of our units. One owner refused her entry out of privacy concerns. My own HOA never asks to enter our units. ...CONTINUED

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