Upside down with options aplenty

DEAR BENNY: My wife and I purchased a four-unit rental property for $935,000 in 2006 and put 10 percent down. The lender split our loan into 80/20 and we have a loan balance of $650,000 and a HELOC balance of $192,000. We have an ARM payment on our first mortgage and our monthly mortgage increases annually. It's now getting to a point where we can't pay anymore.

Currently, the property value is $625,000, so we pretty much are upside down. The bank doesn't want to adjust our loan because it is a rental property and they won't refinance. We also have a problem with a tenant who could not pay rent because she lost her job, and it is hard to find tenants due to the economic downturn. I would like your honest advice on what I should do. Should I just walk away? --Julius

DEAR JULIUS: It will not be a consolation to you, but I am receiving questions from many, many readers with similar issues.

Unfortunately, there is no easy answer. The federal government and many state governments have started implementing plans and programs to assist people who are in your situation, but there still remains a lot of confusion -- and indeed distrust -- of many of these operations. More importantly, many lenders are unwilling to work with people whose properties are underwater.

There are a number of options available -- but only you and your wife can make the final decision. You can file for bankruptcy relief, but you must consult a bankruptcy attorney to determine what the consequences will be.

You can try a short sale. Contact a local real estate agent, and see if there is any market for your property. Obviously, your lenders will have to approve, and this can take some time.

You can ask the bank if they will take the property back. This is called a "deed in lieu" of foreclosure. Or you can just walk away from the property, and let the bank foreclose. However, once again, you have to determine the consequences.

Many states allow lenders to go after their borrowers for a deficiency judgment. Let's take this example: You currently owe a total of $842,000 on both loans. If the bank sells the property for only $600,000, that leaves a balance owing of $242,000. This is known as a "deficiency." You have to talk with a local attorney to see if your state law permits -- or prohibits -- lenders from seeking that additional money from you.

I know you have already talked with your lender, and that's the first thing anyone should do. But don't talk to a local bank representative; it's difficult to find a responsible person in the lending community, but make the effort to talk with someone as high in the chain of command as possible.

DEAR BENNY: I am a property manager for a Northeast condominium association. The municipality just withdrew an eminent domain proceeding. They drive on our "private" property (as they call it) daily and send us citations for multiple issues such as pot holes, trash, sewer backups (minutes after they start). The municipality makes us fight every year in court to obtain our rightful reimbursement under our Municipal Services Act. Currently they are withholding close to $100,000, if not more. Since the eminent domain fight began five years ago, property values plummeted and owners stopped paying fees. We are trying to operate with an 80 percent delinquency. We are filing judgments, and placing liens and writs of execution to collect on these. Today I had to decide between water service for 620 units or trash collection.

My question is simply this: Where do I turn when the municipal government is trying to create a blighted area to rekindle the eminent domain when I have no funds to even pick up the trash? They report us to the Board of Health almost weekly for a situation they are helping to create. --Ernie

DEAR ERNIE: Do you really believe that the 80 percent delinquency was caused by the municipal government, or by the current economic situation? I suspect it's the latter.

Regardless, you have a serious problem with your association -- aside from the alleged interference from the municipal government. Does your association have legal counsel? I assume that it does, since you have 620 units. Your lawyer should seriously explore putting the association into bankruptcy, which is an option that many associations throughout the country are now doing.

As to the problems with the municipality, you have 620 unit owners. They all vote -- or at least have the right to do so. I would contact your local and state elected officials. Explain the situation to them and ask for their assistance. Elected officials are elected by the vote of their constituents, and I suspect that 620 votes would be very attractive to some if not all of those officials. And as we all know, elected officials often enjoy bashing the executive branch of government. ...CONTINUED

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