Selling With A Loss

[parlayman]

Hello Everyone.

Say I have an IP that I want to sell. Unfortunately, instead of profit, I will incur a loss. Questions:

1. The current tenants are contracted for several months. By selling the property, what will be the implications on my side?
2. Say the loan of the IP is $300K. If the selling price is $260K, for example, there is a shortfall of $40K. Will the bank ask me to pay it as a lump sum? Will the LMI help in any case in this scenario?

Pardon the ignorance around my questions.
Never been on this situation before.

Appreciate all your inputs.

Thanks.

 

[evan1875]

Hello Everyone.

Say I have an IP that I want to sell. Unfortunately, instead of profit, I will incur a loss. Questions:

1. The current tenants are contracted for several months. By selling the property, what will be the implications on my side?
2. Say the loan of the IP is $300K. If the selling price is $260K, for example, there is a shortfall of $40K. Will the bank ask me to pay it as a lump sum? Will the LMI help in any case in this scenario?

Pardon the ignorance around my questions.
Never been on this situation before.

Appreciate all your inputs.

Thanks.

The lease will hold. You might be better off wait till the end of the lease to sell so that you have owner occupier looking at your property as well.

When the settlement occurs you make up whatever shortfall from proceeds of the sale to cover your outstanding mortgage.

 

[Terry_w]

The bank will not discharge the mortgage until their loan is repaid. So you will need to come up with the full amount of the loan in order to settle - ie pay the bank another $40k at settlement, based on your example.

LMI will only help the bank if you default and cannot pay. It won't help you.

 

[Jess Peletier]

I had clients who (prior to becoming my clients) found themselves in this situation, and they got a loan with the same bank to cover the shortfall, so it doesn't have to be your own cash, it can be borrowed.

Terry_w - in this situation would the debt still be deductible as it is essentially the transferred left over debt of the IP?

 

[Terry_w]

I had clients who (prior to becoming my clients) found themselves in this situation, and they got a loan with the same bank to cover the shortfall, so it doesn't have to be your own cash, it can be borrowed.

Terry_w - in this situation would the debt still be deductible as it is essentially the transferred left over debt of the IP?

Yes in certain situations a tax deduction could still be claimed if the original asset is gone, but the loan used to purchase it is still going. Best to get advice well before selling for this.

 

[marg4000]

I know of someone who had to do this. Bank gave a personal loan to cover the difference.
Marg

 

[parlayman]

Thank you all for your thoughts. Much appreciated.

So basically, we to have to come up with the shortfall whether by cash or a new loan (i.e. Personal loan).
Will definitely consult our accountant regarding tax deduction eligibility on this scenario.

If we default, then LMI can cover it but then our credit history is badly affected. Is this correct?

Also, what if for any reason the buyer is owner-occupier, are we obliged to pay off the contract of the tenant?

Thanks once again.

 

[Propertunity]

Thank you all for your thoughts. Much appreciated.

So basically, we to have to come up with the shortfall whether by cash or a new loan (i.e. Personal loan).
Will definitely consult our accountant regarding tax deduction eligibility on this scenario.

If we default, then LMI can cover it but then our credit history is badly affected. Is this correct?

Also, what if for any reason the buyer is owner-occupier, are we obliged to pay off the contract of the tenant?

Thanks once again.

LMI will hunt you down for the money after they pay out the lender. So it trashes your credit file and you still get to pay the money.

The new owner inherits the tenant as you are not able to offer "vacant possession". Some OOs will not buy your property because of this.

 

[BV]

So basically, we to have to come up with the shortfall whether by cash or a new loan (i.e. Personal loan).

Where is the property?
I ask because Brisbane for example has still growth left in it so by selling now you will be stuck with a liability and you will miss out on the potential capital gain (which sooner or later will come)

 

[parlayman]

The property is in Caboolture.
It's way under performing and affecting our finances in general.
With our plan to upgrade our PPOR, this IP is holding us back.

So it seems cutting our losses and regrouping is a better strategy than "hold-and-pray".

 

[BV]

So it seems cutting our losses and regrouping is a better strategy than "hold-and-pray".

You are probably right