Can't make mortgage payments

[Techman1]

Thanks to all you guys who made positive comments. To the rest of you, it is better to have tried and lost than not to have tried at all.

We don't claim a deduction on our ppor becuase it is in the name of a company. That is also why we can't claim it as our ppor.

I did find out that you can do what is known as voluntary surrender. Then you don't have any more do do with the property. The lender sells it and if it doesn't sell for what is owed then the lenders mortgage insurance company comes after you for the difference. But the property has to be vacant to do this.

We have come to the conclusion that it is better try to sell the one property that should sell easily this tax year and take the 100+k CGt rather than wait and go in default.

Besides if the lawmakers in Canberra were smart they would do away with the capital gains tax all together to jump start the economy.

If only there was someone that smart in Canberra.

Oh well.

 

[contrary]

it is better to have tried and lost than not to have tried at all.

That's a good attitude to have. At one stage I lost a number of years worth of income and a big loss. It made me very conservative with debt.

At the time it winded me and I felt disorientated, but I dusted myself up, worked and saved like crazy and came back to the game. You still have your friends and family which is the most important thing. And maybe learn a lesson or 2.

Keep breathing and good luck.

 

[marg4000]

You will have learned some valuable lessons from all of this.

When you pick yourself up and dust yourself off - and you will - you will come back bigger and better than ever.

Good luck with your (temporary) exit from IPs.
Marg

 

[Rixter]

How did we end up with this negative cashflow. Well its kind of a long story but I'll make it short.
We had a bunch of properties and we weren't too concerned with the negative cash flow as they were all going up and for the last year we had been selling what we could and we sold all of our best positive cash flow properties leaving the worst ones. Not by choice but by market demand. We have been trying for over a year to improve our cash flow position and it has improved but we are still how do you say it, stuffed.

Pardon my ignorance here but since its a cash flow problem you are having, why did you sell off your best cash flow properties? By doing so surely this has exacerbated the problems you have now even further?

 

[weg]

Since you've been managing (even if just) to pay the shortfall of 156K per annum you must obviously have some decent cashflow coming in from somewhere (with little equity I can't see how the bank would be allowing this through a LOC and not have as yet contacted you first).

If your income is that great selling off just a couple of properties would put you in a much better position; one at a time of course as to not risk the IP's cashflow if that is your concern.

Selling 2 IP should reduce your shortfall by around 40% and I gather from what you have said (having 15K left after tax on one property) you would have little if any debt left on these properties after you sell.

I'm also a little confused at why you would sell the cashflow properties . An investor with so many IP's would have realised they are the ones you would most likely keep. Why did you sell them btw?

If you post a few more details you may get more specific and helpful advice.

 

[sparky23]

When I read it I thought all of the properties had been put on the market but the ones that happened to sell first were the best ones, otherwise it wouldn't make sense.

 

[Token Funder]

TF

Will a bank release the title if an owner is drowning but manages to sell the property at a capital loss and convert the balance of the loan to an unsecured personal loan? Or consider such a thing?

Possible depending on circumstances. However, generally the lender will want to pass the loss to the MI and move on.

 

[Token Funder]

Okay, what is that alternative?

Sell. Techman seems to have available equity but was reluctant to trigger a CGT event. It strikes me as dangerous to run the risk of getting in to more strife and damaging your credit report simply to avoid paying tax on profit.

Investors are always reluctant to accept losses and this is understandable. It just isn't particualrly sensible.

Your first loss is your best loss.

 

[Token Funder]

It's time to get really creative and just keep chewing on this problem until you generate a solution. Can you refinance any and all properties to a very high LVR and use the extra money you draw off to cover the cashflow shortfall for a while? .

This is bad advice. The problem is an excessive and unsustainable level of debt. Unless the income side of the equation changes, adding debt is adding to the problem.

 

[Perp]

This is bad advice. The problem is an excessive and unsustainable level of debt. Unless the income side of the equation changes, adding debt is adding to the problem.

I meant to buy some time to sell on Techman's terms, rather than somebody else's terms. I would have thought that was obvious.

 

[steveadl]

I did find out that you can do what is known as voluntary surrender. Then you don't have any more do do with the property. The lender sells it and if it doesn't sell for what is owed then the lenders mortgage insurance company comes after you for the difference. But the property has to be vacant to do this.

We have come to the conclusion that it is better try to sell the one property that should sell easily this tax year and take the 100+k CGt rather than wait and go in default.

Selling one property (of your own choosing) would have to be much more desirable than letting the bank sell one for you.

 

[Token Funder]

I meant to buy some time to sell on Techman's terms, rather than somebody else's terms. I would have thought that was obvious.

Assuming Techman can't meet current repayments, how is waiting and accumulating further debt going to bring about "his terms"?

Accepting a loss is difficult and I've lost count of the number of bad situations I've seen that could have been significantly mitigated if tough decisions were (voluntarily) made early rather than delayed in favour of wishful thinking of the "something is bound to happen to make this go away" type.

Fear of loss is a common issue with investors:

http://www.bloomsburyfp.co.uk/documents/articles/ARTICLE-Investorsbehavingbadly171006.pdf

 

[Perp]

Assuming Techman can't meet current repayments, how is waiting and accumulating further debt going to bring about "his terms"?

I'll assume you've again misunderstood the point I'm trying to make, because I am familiar with prospect theory, have discussed it on the forum before, and entirely agree with the article. Hard decisions have to be made, but it's far better to take those hard decisions yourself than have them imposed on you by a lender.

Say you have a property worth a generous $500K (ie market for $530K, would take $500-510K in a normal market with balanced supply and demand), you owe $450K, and it's costing you, say, $3K per month, your options are:

1) My preferred option: Beg/borrow an extra $12K to cover payments for 4 more months and allow you to sell it on the regular market, and sell for below-market price of, say, $475K. Pay back the $462K you owe, and walk away with $13K and (relatively) clean credit, ready to fight another day.

2) Let it immediately foreclose: Lender sells the property at auction for $420K, adds on an extra $20K for their foreclosure expenses (probably more, fortunately I don't know), and you walk away still owing $50K, and your credit is ruined.

Yes, there's a risk the property won't sell, and you'll have to go into foreclosure anyway, and have lost $12K more. I think it's a chance worth taking. Techman1 could drop his price (during his 4 months on the regular market) all the way to $400K and still be better off than letting it go into foreclosure.

If your point is that Techman1 should have dropped his price more aggressively last year and gotten these properties sold before he got to the current cashflow crisis situation, I wholeheartedly agree. But he's there now, and I'm trying to tell him to do that now, in the hope that it's not too late to prevent foreclosure.

Let me be crystal clear: I'm certainly not recommending borrowing $150K more to cover negative gearing costs for another year on all properties, relying on capital growth to allow further refinancing. If the OP can't meet ongoing holding costs he has to liquidate some assets, as I don't think anybody can count on significant capital growth for several years.

If you still think option 2 is better, then I guess we just have to agree to disagree.

 

[steveadl]

I guess we just have to agree to disagree.

"I don't agree to that!"

 

[josko]

Let us know how you go techman,

For those of you who question why he would sell off his best properties:

Those properties are the only ones selling in this market.

I have already sold one of my best for nearly 50k under previous val and am about to sell my two very best.

The market controls this. If Techman is in the same situation I was in, he is doing the right thing. All properties have to go on the market and you sell whatever you can to fix the problem.

I don't believe refinancing is the answer until he offloads property. I am hoping only one of my Scarborough sells, so that I can LOWER the debt on my other favourite, and refinance to a lower interest rate- where it will be positively geared.

However, with finance hard to come by these days, I will be taking contracts on both incase one falls through.

Do what you have to do and don't delay. There are better days ahead that will see you financially more stable and alot wiser for the worry.

All the best and keep us tuned.

Regards JO

 

[Token Funder]

Hi Ozperp,

We're both saying that tech should avoid foreclosure by selling what he needs to, rather than waiting for the lender to take it. We're on the same page there but where we differ is the assumption that simply waiting will bring about a "regular market" and somehow be better than doing it now.

What, after all, is a regular market? What evidence is there to suggest that by incuring an additional, say, $12K in debt to delay 4 months the market will be better than it is now. It's the classic sucker bet..."I don't want to realise a loss so I simply make the assumption that it is better to delay than to act now."

The only thing tech could be sure of if he borrowed more to extend the inevitable is that his debt will be higher then than it is now.

 

[Perp]

We're both saying that tech should avoid foreclosure by selling what he needs to, rather than waiting for the lender to take it. We're on the same page there but where we differ is the assumption that simply waiting will bring about a "regular market" and somehow be better than doing it now.

No, I think we ARE saying exactly the same thing. I don't think he should wait for the market conditions to change (and maybe $12K was overly generous); perhaps where we differ is that you seem to be assuming techman1 still has a few weeks to sell it himself, without extending his debt any further. If that's true, then we're on exactly the same page.

I read it that he was running out of time to sell. If Techman1 still has 4 to 6 weeks available to sell the property himself, I agree that he shouldn't extend his finance any further.

Techman1, another thought: if you think it would be more advantageous to sell one of the properties with fixed-term tenants in them, consider firstly asking the tenants if they want to "be released from their lease obligation" You might just find that somebody would be happy to go but thought they were stuck. If nobody is particularly keen to move, try offering incentives to terminate the lease, eg pay for moving costs, maybe throw in $5K compensation for the inconvenience from sale proceeds. (Or less/more depending on their circumstances, and how much you think would be enough to make them think about moving.)

 

[Seaview]

Hi

Re tenants .... it may be possible to sell IPs to investors, or failing that, give tenants incentives to move out (a few grand towards removal expenses often works).

We also had a big cashflow problem and needed to sell 1 or 2 houses, but we open listed several houses which increased our chance of selling one. Open listing allowed us to have the WRAP people offer them to their clients as well as a local RE agent.

The WRAP option or rent-to buy / sandwich lease option type deals often double rental income and can give you some cash up front from deposit. Don't ask me any details, as it goes way over my head. I am just happy to have IPs listed with 2 separate selling strategies at work.

We actually just sold one (at last) through the RE agent, and combined with falling interest rates, this should save our bacon (for now), but I can really relate to your problem.

If you want to change your RE agent contract to open-listing I suggest you talk to the agent. We were meant to give our agent notice but he said not to bother, and was happy to switch listing from exclusive to open, rather than lose the listing. For WRAP info try the webuyhouses web site or Rick Otton who is an expert at this.

Good luck.

Seaview

 

[nonrecourse]

I think a lot of PI's may well find themselves in a minski ponzi financier situation due to the financial crissis. If expected capital returns over the a 5 or unimaginably a 10 year period are zero then I suspect that 80% of PI's or greater will be in this unenviable position.

I mean think about your debt, how long would it take you to pay off based on your yearly income as the expected capital return is zero over a decade. That I reckon will be the bottom when the majority come to that realisation.

What a breath of fresh air, someone with a bit of common sense. The add on is its the gearing that gives them no room to move.