Are you over leveraged with negative equity, and losing sleep worrying about it?
Every time I do an event, I wind up in conversations with several folks in the room who are upside down and owe more than the current market value. This article will address your options, none of which are pleasant, but most certainly one of which will be the final outcome.
First of all, you're not alone! The numbers are all over the place, but somewhere between 3 and 8 million people are in the same situation. That doesn't make you feel any better, because when the ship's going down it matters little who's the first to drown. I should take a second here to remind you if you followed my instructions from the beginning, you couldn't be in this position 'cause you would not have personally guaranteed debt to buy houses. It's against my rules, and has been for 25 years! Ok, you didn't know me then, so I'll forgive you, and if you did know me and chose to do it anyway, I'll still forgive you, especially if you're a testosterone laden man. I should point out my forgiveness won't fix the issue, and won't help you sleep. I guess this is where I should also disclose that I have millions of dollars in personally guaranteed debt on commercial property myself.
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Looking back, I wish I had listened to myself because every one of those projects are at a stand still, waiting for capital and an end use to return. All have issues with lenders, some will turn into litigation, and none have cash flow. So, as I write this, maybe I'm doing it for me as well as you, but at least you'll know there's someone with a much bigger problem than you. Now, don't you feel better already?
You have several options. The trick is to pick the best one and move it to a conclusion. That's the hard part. Hope Is Not A Strategy. Most people can make a list of their options on any problem, but I find many quit there. You can't! It won't go away without action!
Here are your choices, as I see them:
o You can continue making payments, probably suffer a negative cash flow until the value goes back up and time fixes the cash flow. This is the solution many advisers will give you because it's the righteous thing to do. Of course, these advisors are not suffering the negative cash flow or are in any pain over your situation. Here's the problem with this advice; you may not be financially capable of suffering the negative cash flow, especially on multiple properties, and even if you are, here are the questions you should answer
o How long can you afford to go negative?
o When will it catch up, and will the cost ever be recouped?
Now the reality. No one knows when your equity will return, and according to an article in USA Today, it may not be in your lifetime! The article said 2005 real estate prices may be the highest we'll see in our lifetime. That's actually correct in one sense, and dumb in another. Who's lifetime? Mine or my 2 year old great grand daughter's? However, the point is right on. I have no doubt it will take years to get back to where we were in value, and cash flow is based on rents which are adjusted to economic conditions, so it may take years to see them climb enough to cover your negative cash flow. In other words, choosing this solution, assuming you can, has no assured positive conclusion, and may just cost you thousands of dollars to protect your credit.
You can negotiate with the lender to modify your loans, to drastically reduce the payments, so you at least break even. You may even be able to get a principal reduction, and it's common to get a low interest, fixed rate loan. This costs you nothing if you do it yourself, and very little if you have an attorney do it, which is my recommendation. Don't assume it won't work for you, especially if your opinion is based on any conversation you had in the past with your lender. This changes daily, and is exactly what the government sent billions to the banks to fix. These loan mods are now government funded. This is your chance to get a piece of the government bail out gifts, and don't assume you won't qualify. There are plans for people who are current and others for people in arrears. Again, it costs nothing to try, and in my opinion, is foolish not to. You can always go to one of the other options if it doesn't work out.
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o Let a skilled attorney do it for you. The results will not be the same as you doing your own. It's worth the cost. Perhaps you could divert a mortgage payment or two to the attorney to get the banks attention.
o Offer the property back to the bank as a "Deed In Lieu of Foreclosure". This may be your best option by far, because in most states if the bank accepts the deed, they will not pursue a deficiency, and in some states it's now the law. This should be done only with the help of an attorney who can also negotiate no derogatory marks on your credit. You may or may not be successful, but if you are, this is an easy way out and it is the top of my favorite list. Forget any money you have in the deal... When The Ark Is Sinking, Throw Over The Elephant First. You can always get free equity in houses and buy as many as you like and do it correctly this time, being pig headed over loss will likely only make the loss bigger when you finally do come to your senses.
o You can simply let the lender foreclose if all the above fail. It will ruin your credit, if that's still a concern...and it is, for most that have it. However, it may be time to come to grips where your priorities lie. If your financial drain is causing extreme hardship in your marriage or your health, something has to go!
o Credit is nice. It makes you feel worthy and gives you freedom to buy stuff you can't pay for now. Of course, that's what got you here to begin with. The good news is life goes on without it. It's not as bleak as you picture it now. People will still love you. Your friends don't check your credit and if it does matter, they ain't your friends. Bad credit can be cleaned. Time will fix it, and you will get some peace along the way. If you know how to make a living and produce revenue, they can't take that away. Your value is in your mind and your heart, not your credit score!
o Bankruptcy is always an option, and one many are taking. Of course this stops all creditor pursuits, but you should ask yourself - what's the conclusion to this if I file. Chapter 13 will allow you to reorganize and put all of your lenders at the mercy of the court, and you can literally recreate your own debt structure with a reasonable plan. However, what are you trying to save? Is it worth the years of being under tight scrutiny, and handcuffed to the plan? What's the end conclusion and does it make sense, or are you simply stalling the inevitable...complete liquidation? Tough questions, but must be answered! Your credit is gone, regardless of which type you file.
o Chapter 7 will be over in a few months, but will strip you down to a new beginning. Maybe that's more than you can handle, maybe not. The more you have, the tougher it is to lose it, but I suspect the more days you spend without peace, the less value all these things begin to have. I said in the beginning none of these choices are pleasant! They all require soul searching, and competent advice. Don't let your answer kill you before you reach it, and if you're worried about what your friends or relatives will think forget it. They're probably in worse shape than you, and are not willing to disclose.
Getting through these times will make you stronger, build grit and condition you for better times to come. It will also narrow down your list of so called "friends". It may even make us all stop and gain a new appreciation for the simple things in life, most of which are free. I promise to talk about something more positive next month. I'm getting depressed writing this. I've gotta go take a pill now!
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