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Registered Usurper
Join Date: Sep 2005
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Dear friend needs real estate legal advice
I have a dear lady friend (we go back to childhood) who recently retired and is faced with a very stressful dilemma. Can any of you offer advice to her? Below, I describe her situation as best I understand it, as if it were me who has the problem. I know many here have much experience in real estate and legal matters and I would greatly appreciate any advice you have to offer her.
Her story: Being underwater, ineligible for loan reevaluation and unable to make the mtg. payments, I am forced to walk away from a four unit apartment building in LA. I have been living in one of the units and I have a physically challenged relative living, rent free, in another unit. The remaining two units are rented, one at market value, the other, under rent control, at significantly less than market value. I informed the bank one year ago that I'm walking away from the property and have not made mortgage payments since. I'm waiting for the bank to foreclose and they have not told me when foreclosure proceedings will begin. In the meantime, I have moved out. I have continued to collect rent from the two rented units and I plan to continue to do so until the bank issues a foreclosure notice, at which time I will inform the tenants and stop collecting rent. I also wonder, given that the bank is unresponsive when questioned as to when the foreclosure process will begin, whether I should try to execute a short sale and be done with the property altogether, except, of course, the bank... Bottom line question, what should I do?
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09-28-2012, 05:04 PM
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Banned
Join Date: Apr 2005
Location: Columbus, OH
Posts: 18,162
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I would need a lot more detail to advise this person properly.
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09-28-2012, 05:54 PM
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Registered Usurper
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Quote:
Let me know what to ask her.
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09-28-2012, 06:01 PM
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Registered Abuser
Join Date: Jul 2007
Location: Southwest Montana
Posts: 2,738
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This may not be the place for advise for your friend.
A LA R/E attorney and her accountant would be my first stop. Too many variables for answers here. I have seen many situations get worse because of the wrong suggestions.
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09-28-2012, 06:51 PM
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Registered User
Join Date: Apr 2011
Location: Newark DE
Posts: 83
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underwater
She might be able to negotiate the amount owed on the note. If she is upside down on the property the bank knows they will be in the same position as her if they foreclose. I would look for private money and offer to take the bank out at 50% of what is owed. Banks don't like having bad loans on their books and should be willing to take there loss and move on. Good luck
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09-28-2012, 06:52 PM
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The Unsettler
Join Date: Dec 2002
Location: Lantanna TX
Posts: 23,885
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What does she need in rental income to get right side?
Can she apply for aid money to cover relatives rent and move in with them as their caretaker then rent her old unit full price?
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09-28-2012, 07:14 PM
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Checked out
Join Date: Jun 2009
Location: On a beach
Posts: 10,127
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Just out of curiosity, when did she buy it?
I've seen the numbers for a lot of 4 plexes in No. and So. Cal that have sold over the past 10 years. I have to say, I don't get it. The numbers NEVER pan out. Things like paying $950,000 for a property that generates gross rentals of $60,000 a year, if at full occupancy. Crazy stuff like that - which actually sells - I don't get because even in a best case scenario, the property doesn't work. Anyways, how underwater is she? A short sale would be ok, but she seems to not understand what a short sale is. Because she says it will solve her problems "except for the bank." By definition, a short sale solves the bank problem. B/c in a short sale, the bank agrees to take less than it is owed. She can't "short sell" without the bank's consent, b/c without the bank's consent, the bank won't release their mortgage. If she hasn't paid for a year, and the property was already underwater then, it is probably hopelessly underwater by now. By the time you add in the delinquent payments, penalties, interest, etc. If she wants to "walk away" she can just do nothing. Keep collecting the rents. Legally, nothing is going to happen to her, that hasn't already happened (screwed credit, etc.). Eventually, the bank will get around to foreclosing. She says after they start foreclosure, she'll tell the tenants to start paying the bank, but that makes no sense. If she's not telling the tenants that now, why tell them after foreclosure starts? The start of foreclosure doesn't change anything as far as the rents. What will likely happen is the bank will eventually do 2 things: 1) They'll start a non-judicial foreclosure proceeding. This is the normal, out of court foreclosure, where they'll issue a Notice of Default and start the clock ticking to a foreclosure sale. 2) At the same time, they'll file with the court an action which will include a cause of action to appoint a receiver. They'll go in on a motion at the beginning of the case for an order to appoint the receiver, which will be granted. The receiver will go to the property and post notices to the tenants telling them they need to pay him instead of the owner going forward. There will also be an order for her to turn over any rents she has, the security deposits, books and records, etc. She will be out of possession of the property from that point on, the receiver will be in full control. The receiver will be in place for 4-8 months while the non-judicial foreclosure moves forward. It'll likely be set for public sale, but postponed by the bank several times for various reasons. But, it will eventually in that time period go to a sale, which will take place at the courthouse. At the sale, the bank will "credit bid" the amount of the debt. Because the property is underwater, the credit bid by definition will be more than the property is worth, so there won't be any other bidders. The property will therefore be purchased by the bank at the foreclosure sale. The bank will then sell the property. They will not get from the sale enough money to pay their debt. From there, there's an issue. Since she is living at the property, and it's not more than 5 units, there's a chance that the loan is classified as a "residential" loan and may be non-recourse. That means they can't come after he personally for a deficiency. This is probably the most impt legal issue she needs to find out! i.e., is her loan recourse or nonrecourse. If the loan is non-recourse, after the foreclosure sale, the matter will be over. If it is a recourse loan (and it very well may be, she needs to check her loan docs), then technically she will be responsible for the deficiency. Whether the bank actually goes after her for it is hard to predict. A lot depends on the financials she gave them when she took out the loan. If they show a lot of assets, esp. real estate with equity, they may go after her. If she has other assets, she could start doing some, umm, "asset planning" in advance of all of this. |
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09-28-2012, 08:13 PM
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Checked out
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Getting a good lawyer is good theoretical advice, but in cases like this often is not really practical. She's going to have to come up with a $2.5-$5K retainer, which will be gone quickly, and then have monthly legal bills to add to her other problems.
And, there's no guarantee that a lawyer can do anything to solve the problem. At this time, from what I've seen, banks are highly unlikely to "work out" something like this. By "work out" I mean give her a discount, etc. Their policies are generally no deals, just move it though foreclosure and get it off their books. They are large institutions and are generally inflexible on their policies on these. IMO, the bank won't do much, short of allowing her to fully cure her default and come current on the payments, which is likely impossible. Lawyer or not, what I've outlined above is highly likely to be the outcome at this point. A receiver and foreclosure is the very highly likely outcome. Last edited by McLovin; 09-28-2012 at 08:23 PM.. |
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09-28-2012, 08:19 PM
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If you talk to her, ask her:
How much is owed? What is the actual gross rent at full occupancy? |
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09-28-2012, 08:24 PM
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Banned
Join Date: Apr 2005
Location: Columbus, OH
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Quote:
Finding quality counsel in the area would be a better goal. |
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09-28-2012, 08:50 PM
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Registered Usurper
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Thank you all for taking time to read my post.
McLovin, I really appreciate the effort you've spent replying. I'll be talking with my friend over the week end and will go over your posts with her. She did not want to lose this (her only) property and had applied for a loan reevaluation, at which time she quit paying the mortgage. Months passed, then finally a request for docs/info, which she provided, then more months and another request for same, again, provided, more months pass then, WTF?!, a third request for same and, for the third time, provided. More months passed and the bank then told her that she doesn't qualify because it's a commercial property, so it's apparently a recourse loan. So she notified the relevant department of the bank that she had to walk away and, months later, they said they'd get back to her; that was months ago also, so she called the bank again to ask about the foreclosure procedure. She was told, surprise!, they'd get back to her. My friend has no assets, real estate or otherwise, for the bank to go after. She feels terrible that she is losing her investment, which she's had for maybe fifteen or more years and hates walking away, but really has no other choice at this stage.
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09-28-2012, 10:31 PM
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Quote:
That means she must have refinanced it during the bubble to pull "equity" out. (Equity in quotes, because it wasn't really there, it was just air in the bubble). I believe the refinance would be recourse in most jurisdictions. That's in addition to you already saying it's a commercial loan, which would almost certainly be recourse (assuming she holds title and the loan in her name personally). There's always some options to try, but if it's truly way underwater, and can't cash flow even at full occupancy, it's going to be very rough. Her default, for example, takes out some options. She'll NEVER be able to refinance with any normal lender now. Private lenders aren't likely to be interested, b/c the only way they can be secured is to take out the bank's loan and lien, and the only realistic way to do that is to pay off the bank in full. No one is going to put that kind of money in if the property is underwater. A short sale is a possibility. Some banks do seem to be loosening up on short sales. The likelihood of success depends on just how far underwater she is. The good thing about a short sale is she can try to get it going at no cost to her - get a broker to list it and see what happens. It's a bit of a no-lose try for her, but even if she gets a buyer, the hard (and maybe impossible) part will be to get the bank to accept the short sale (i.e., accept less than their loan). As she's seen from the bank's non-response, delays and ignoring of the problem, banks are curious creatures. They have very rigid policies that for the most part are not deviated from, even if it costs them huge amts of money and makes no sense. Part of this is rooted in the decision making process at large institutions, which is hugely unwieldy and tends to favor the status quo (b/c if the status quo/policy is deviated from, and something goes wrong, someone will likely lose their job). Part of it is because banks act like pendulums. In 2007, they were riding high, freewheeling, giving free money to everyone. Now the pendulum has swung and they are at the opposite end, they are terrified and frozen into inaction. Again, there are some variables, and some chances, but I've seen this a lot, and like I said, IMO there's a 90%+ chance this will eventually simply go into foreclosure. B/c that's the decision that no one at the bank can ever be criticized for or lose their job over. If she doesn't have the ability to raise significant money to solve this problem (ability, and willingness to throw a lot of money at this), the odds go to 99% IMO. |
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09-29-2012, 07:50 AM
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09-29-2012, 11:36 AM
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You do not have permissi
Join Date: Aug 2001
Location: midwest
Posts: 39,824
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i just skimmed over this, but:
1). She's owned it for 15 years? That's a lot of invested capital and difficult to "walk away" from. 2). She lives in one unit? So 3/4 is probably business and tax deductible. 3). Only 2 of the 3 other units are rented? Fix/Rent the last one asap! That's wasted money and income. It sounds like she's going to be losing her home, and business. There's a lot on the plate. She needs to sit down with someone for a few hours and figure out her rental income vs. loan payments. Make a list. Then add it up. A few hours spent vs. an entire life-style change. Moving sucks. (btw- FK that bank. There are others in the phone book which can fulfill that contract on better terms, and make things right again.) Last edited by john70t; 09-29-2012 at 12:35 PM.. |
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09-29-2012, 12:33 PM
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Registered Usurper
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She's owned the property for 10 yrs, is underwater due to the real estate bubble burst coupled with money taken out for new roof and other upgrades and maintenance...never took money out of the property for other reasons.
She's always lived in one of the units, her disabled, non rent paying, son in another. One of the two remaining is rent controlled, the other is rented at market value. She's vacated the premises and is resolved to let the property go into foreclosure. Thanks for all your input.
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09-29-2012, 02:27 PM
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Registered Usurper
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She's actually doing the bank a favor by not renting out the two apartments she and her son have vacated; two less evictions for them to execute.
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09-29-2012, 02:39 PM
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You do not have permissi
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You can only offer advice sometimes... Emotions <> Logic. |
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09-29-2012, 03:13 PM
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Very typical scenario these days. She should list her property with a Real Estate Broker as a short sale. A short sale is technically a foreclosure but has the advantage of greatly mitigating the impact to her credit history. Creditors view a short sale as responsible and proactive, as opposed to a bank foreclosure. The broker should also include in the terms of the short sale forgiveness of the debt. Very important!
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09-29-2012, 05:09 PM
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Registered
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Location: AZ
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Quote:
That said, a short-sale is still the better option over a foreclosure in most cases. Depending on her situation, you might have her also look into the deed-in-lieu option. Quote:
Regarding tenant notification: It's probably a good idea to inform the tenants as soon as she gets the official foreclosure notice from the bank. It could be legally required (check her State's Landlord-Tenant Act) and if nothing else it's a good CYA measure. Also, current rental/lease agreements will remain in place and enforceable as mentioned, but ONLY for legitimate, bona-fide leases/tenants. Her relative(s) will probably have to vacate (within 30 days typically). Probably a moot point if everyone is on a month-to-month agreement anyhow. Just make sure they know that upon possession, the bank will not be "renewing" anyone's lease after their 30 days is up. Quote:
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I am guessing it is still a "residential" mortgage, but she definitely needs to confirm. Also, even if it is a non-recourse loan, there could still be concerns if any of the debt is not considered "purchase money" (cash-out re-fi's, seconds, etc.). Last edited by Eric Coffey; 09-29-2012 at 05:25 PM.. |
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09-29-2012, 05:22 PM
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Whether the loan is recourse or not, in executing a short sale it is essential the debt is forgiven as a part of the deal. Banks are a lot more cooperative these days as they stand to lose more financially in a standard foreclosure. Typically the first lien holder (Trust Deed) settles for a certain amount, and the second and third settle for a fraction of the obligation.
An experienced Broker will know how to negotiate on behalf of the seller and absolve the debt. |
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09-29-2012, 05:59 PM
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