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
DEAR BENNY: My husband and I divorced in September 2008. We own a house that was purchased in June 2006. I currently live in it, and according to our divorce decree, my ex-husband pays half the mortgage. Due to the current state of the housing market, we are very reluctant to put it up for sale and potentially lose a lot of money. He has asked me to sign a quitclaim deed and deed the house to him. We are to have the house appraised and split the equity that we have in the house (approximately $180,000). He is in the process of refinancing it himself, to get me off the mortgage. I will be allowed to rent the house for several more months until I find a place to live. Do you think this is a wise move? Additionally, are there any tax ramifications we need to be aware of? –Heidi
DEAR HEIDI: Yes, it could be a wise move if you are prepared to move out of the house. Before you commit yourself to this transaction, make sure that you and your ex reach agreement — to be reduced to writing — as to how long you will be able to stay in house.
The biggest problem that divorcing couples encounter is that even if the family home is transferred to one of the parties, the mortgage lender will usually not let the transferring party off of the loan. But if your husband is prepared to refinance and have the loan in his name only, you have overcome that big hurdle.
As for tax implications, the law was amended back in the 1980s, so that no gain is recognized when the property is transferred — and thus no tax has to be paid. The basis of the transferee (you) will be added to your husband’s basis for tax purposes.
But there are limitations and restrictions on this. First, it does not apply to a spouse (or former spouse) who is a nonresident alien. Second, and perhaps more important, the transfer must be "incident to a divorce." According to the Internal Revenue Code, a transfer of property is incident to the divorce if such transfer:
- Occurs within one year after the date on which the marriage ceases, or
- Is related to the cessation of the marriage.
The IRS has taken the position that if the transfer is required in the divorce or separation agreement, it is incident to the divorce if the transfer occurs within six years after the date on which the marriage ends.
On the other hand, for transfers that are not made under a divorce or separation instrument, or that do not occur within six years after the end of the marriage, there is a presumption that the transfer was not related to the ending of the marriage. This is a rebuttable presumption that can be overcome if the parties can demonstrate facts to support the position that this was really part of the divorce requirements.
It is not clear from your situation whether such a transfer would, in fact, be "incident to a divorce." You should consult legal counsel for specific assistance.
DEAR BENNY: How can I obtain foreclosure lists for my area? I thought this list was free, but everyone seems to be selling them. Any recommendations? –Diane
DEAR DIANE: That’s a surprise to me, since there are literally thousands of Internet Web sites that list foreclosed property — 871,000, to be exact, when I did a search. You can also contact local banks and see what they have in their inventory.
But a word of caution: Do your homework, inspect the house, and consult legal and financial advisors before you sign a sales contract.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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