I’m new on this forum but I’m looking for some advice. We have a very small rental property that we have been trying to sell for almost 3 years now. It’s too small for most people (900 square feet or so), so many people are not interested in buying. We are having trouble keeping tenants renting for a long period of time due to the area of town and the size of the house.
It is a FHA mortgage and the bank is calling saying we need to refinance in order to rent it out (it was originally bought as a primary residence, but got too small for my family). The refinance is the main reason we want to to sell the place, along with having to cover two mortgages if we can’t find tenants. We currently moved and have a mortgage on our main residence house now.
My question is this. Should I let it go into foreclosure and wash my hands of the situation or try to max out a few unsecured loans to pay off the mortgage and hope to keep renting it out? I want to let it go into foreclosure since we won’t need any credit for 10 years or so. I’m worried about the consequences of this though. The mortgage balance is $45k and the house is worth $50k but like I said, we can’t find buyers.
A couple of reasons I think foreclosure wouldn’t be a horrible thing in this situation is that the mortgage is only in my name, so my wife’s credit wouldn’t be effected. The balance isn’t huge so a bank might not want to fight it too much to try and get their money back. And it’s a FHA loan so it should mostly be covered by FHA insurance which would also be a plus for this situation.
The General Questions forum is for questions with factual answers. This is more of an advice and opinion question, and as such it belongs in our In My Humble Opinion forum. I will move the thread there for you.
Moving thread from General Questions to In My Humble Opinion.
Allowing a property to go into foreclosure can be difficult, but sometimes it is rational to do so. But I’d want to know more about your situation before offering advice. How long can you continue to carry the mortgage with your savings, for example? And how hard have you really tried to sell? Have you tried different agencies? Would you be willing to sell at a loss?
I will say that it’s never a good idea to run up unsecured debt to pay down a mortgage. You’re trading low interest for very high.
Thanks for the reply. The unsecured debt would be 4.75% interest which is what we are paying on the mortgage now. The unsecured debt would have to be paid back in 5 years and it would total the mortgage payment we are paying now – around $500 per month. The reason for the difference in years (mortgage is 30 year loan) is that the mortgage requires flood insurance and mortgage insurance. Those both go away if we got rid of the mortgage. (we aren’t in a flood zone, almost zero chance of a flood in this area). Since we are paying mostly interest each month on the mortgage, the unsecured debt would turn that around and we would be able to pay more principal each month.
We have tried a couple realtors and are trying to sell it at a loss right now. We can’t go any lower than we are right now.
I’m not an expert in the situation, but you say it’s worth $50k with a $45k balance. Have you tried biting the bullet and selling for the payoff balance? Sure, you’re out $5k, but that might be better than the credit hit for foreclosure.
EDIT: you replied before I did. What are you trying to sell it for now? And how long have you been trying to sell?
It’s worth $50k but we are trying to sell if for $45k. After realtor fees and other fees we would already be paying $5k to get out at that price. I don’t think we can go lower, it just wouldn’t make sense.
If you can’t find buyers, the house may not be worth what you think and/or hope it is.
In terms of general advice, it sounds like taking the hit and moving on is the best plan. Maybe that means working with the bank to get a short sale, maybe it means letting the foreclosure happen. Going into unsecured debt to keep going a bit longer seems like a bad plan.
Personally, I think I’d do the unsecured credit thing and pay it off in a few years, then just keep it as an income producing rental. I would rather take a bigger loss than $5K than kill my credit with a foreclosure. Having shitty credit is expensive, and it’s going to stay bad for years.
How long have you been trying to sell? The house may actually be worth $45k, but the winter is a slow selling season AFAICT (not a realtor). I think it picks up in the spring when the outside of the house is looking nicer.
In my neck of the woods (Brooklyn) 900 sq ft is positively roomy.
900 sq ft may not be what a family of five is looking for by you, but it’s perfect for a single person with their two average size dogs or one large dog. You may need to target a specific rental audience. Middle age, single, professional with a large dog type and then ease into the if you like it here, perhaps you would like to buy it from us in a couple of years inquiry.
How bad is the neighborhood? How nice is the house?
You can’t afford two mortgages without a tenant - you have to refinance to be able to use it as a rental - and instead of re-fi (which I assume would be roughly ame payment now that you can’t afford) - you want to run up un-secured debt to pay off the mortgage instead of re-financing it?
if you can’t afford the second house - and you can’t keep it rented out to make money on it - and you can’t sell it - sounds like its time to give it back to the bank - “quit claim” I think they call it.
Taking out more debt to pay a debt you can’t afford makes no logical or financial sense - get out from under it.
So the house has been on and off the market for almost 3 years. During that time we also had renters in and out. The area isn’t very nice so the types of people that try and rent the place don’t have the best life situations. When it has been rented out I have used a rental management company because they pre screen the tenants so I don’t get the complete worthless tenants. I guess ideally if I could get solid tenants in there for a while, it might be worth it to keep as a rental but I’ve had so many problems that I’m to the point that I just want to give it back to the bank and be done.
Ok, so we could afford to pay both mortgages, but it would be stretching our budget to the limit. It makes no sense to do this if our mortgage payment is going mostly to interest every month. The reason I would move it to low interest unsecured debt is to be able to pay much move principle each month and get it paid off soon. It’s not ideal but I’m worried about a foreclosure and thought this might be a less worst option.
If you read the landlord message boards, as I do, you will find that property mgmt. cos. for the small landlord are a waste of time and money. You say they screen–so what? You can do that. What do they charge you and I’ll bet you’re tied into their repairmen and tradesmen who may be handing a kick back to that PM. Did you try landlording yourself? There’s on-line help, NOLO press has help, it’s kind of a pain, but not that hard actually with 1 property. And the expenses on the property are deductible against your employed income.
The property management co I use charges 10% a month to screen, take rent and set up repairs. For a $575 a month rental payment, it’s worth it to me. I live about 30 - 45 mins from the property in another town and it’s a little piece of mind. They can direct deposit the rent to me each month which helps so I don;t have to drive out each month and pick it up personally. I can also use my own repairmen to fix issues.
First, if you can’t sell it for $50K, it’s not worth $50K. Perhaps you mean it’s appraised or assessed at $50K. If the former, great; if the latter, you’re paying more in taxes than you should.
Second, I don’t quite understand how you can get a low interest unsecured loan for $45K. You must have pretty good credit, and it’d be a shame to waste that.
Find out from your realtor whether it’d be more attractive if you put a couple thousand into fixing it up. A good realtor should be very helpful in identifying the things that people pay attention to, and where you’d get the best bang for the buck in that regard.
There’s no mail service where you live? We get our rent checks by mail. Works great.
We haven’t used a service, and we’re lucky to have decent renters (though not particularly handy or clean ones). I never wanted to be a landlord, and I’m happy my wife agrees that when they leave we’ll sell. But it sure was nice not to have to sell it at the market low point, when we moved!
I was at a conference where a panelist mentioned one of the big benefits of mgmt company is to kick out undesirable tenants way behind on their rent so you don’t have to deal with the paperwork and emotions involved.
