Save investment property w/tenant??

[purenergy]

In Fall of 2005, my husband purchased a home. He put some $$ in it, fixed it up -- and then we decided to move into it. He then refinanced. At the time, yes, it was our "primary residence."

We were in the process of selling our old home. We had offers twice; both fell through (blessing in disguise?). But then found out that we had made an error in thinking we would avoid Cap Gains tax on that sale (having lived in it over 2 years) because we had made a similar sale less than 2 years previous -- another home we owned and had lived in, then rented out.

Anyhow, we realized we should really move back to our old house, and sell the "fixed up" house. It sat on the market for a LONG time -- 9 months or so. Finally got a tenant in who wanted to do a lease option about a year ago.

She signed a 2-year lease. Now we are in Default. (Rent only covers about 1/2 the mortgage.) Everything has hit the fan and we are at risk of losing our primary as well, and will surely lose a couple of out-of-state properties that my husband also owns. We have continued to collect her rent, and my husband has gone back to his "old" job, leaving real estate behind for now (sort of!).

What are our obligations to the tenant? We would like to keep collecting her rent because honestly, for a couple of months, we needed that $$ to pay our regular living expenses,etc. We are bringing more income now, but not nearly enough to cover the mortgages, etc.

The tenant wants out of the lease and is not able to purchase the home. We are proposing lowering her rent and switching to a month-to-month contract. That way, if the house forecloses, she will have plenty of notice and we plan, in that case, to give her a couple of months free rent.

I searched the loan docs and could find no "Assignment of Rent clause" in the documentation. Of course, that is most likely because when docs were signed, this was a "primary" residence, and we DID intend to stay there. However, we only did so for about 6 months and the docs say something about "intending to stay for 12 months." Of course, lives change and "intention" is one thing; reality another.

Now, we have been banking her rental payments, as we are in default, and want to put $$ away for a hopeful mod at some point (or just to move if we need to). Our first priority is to save our primary home from foreclosure and we are working on that (mod + possible TILA violations, etc.). However, if there is any way to save this house, we would like to do so.

Is there anything I SHOULD or SHOULD NOT put in the hardship ltr to the bank on the 2nd home -- the one that currently has a tenant? I had thought of putting in the letter that "we have a tenant" to show there is some income. But then could they demand the rent $$ we are collecting from her and have collected the last few months? Or would it be of benefit to show that rental $$ as income that could be applied to the monthly loan payment in the case of a successful modification?

Thanks for any input.

[Leigh]

Hi there,
I'm certainly no expert but wanted to share a few things. We, too, had/have rental properties out of state (primary is in CA) and while the homes had periods of not being rented, they've mostly had a decent track record. Our main prob came from a home in
Fl where prop taxes and ins seemed to triple practically overnight for us and bottom line we unfortunately recently filed Ch 7. Fl is a deficiency judgment state. You mention that "you surely will lose a few properties out of state as well"... My suggestion would be to consult with a BK atty (most initial consults are free) as well as a good accountant. We probably waited too long to file as we were trying to do everything humanly possible to avoid it. We worked all the numbers looking at what the tax hit would be for "forgiven debt" if the state didnt do "deficiency judgments", but in the end, even if we cashed out all our retirement, we still could have been faced with a 30-50k tax bill and not have a thing to fall back on. We've thought about trying to modify the loans on 2 of our rentals whereby rent is nearly equal to monthly payments but both these homes are the ones that seem to have the highest cost for turnover (last summer $7500 for both after tenants trashed... that was kind of the beginning of the end for us, following the taxes/ins in Fl). But as *** from this board has informed me (and this makes sense) the loan companies can't work to modify our loans til the BK is discharged. And even then they may want us to reaffirm the debt which we wont do. In other words I suspect both those homes are going to go to foreclosure as well. I hate it, but we made mistakes and can't jeapordize our family at this point. We have not made payments on our rentals in a few months but have received rental checks. I HATE using them for something else, but also like to think that I'm paying us back for all those months when it wasnt rented /damaged. Of course current tenants have nothing to do with that and for that I feel awful. I plan on offering a few months free rent, even tho the timing of their move-out will coincide with their yearly lease being up. I truly dont think the bank cares whether you're receiving rent or not. At one point I called GMAC and told them (this was in the beginning) that we were having an awful time but I could send them the rent I was receiving on Fl house (1/3 of the payment). They matter-of-factly told me they "dont take partial payments" (altho wouldnt be surprised if they've changed their tune since).. and that "we weren't behind" so there was no incentive for them to work with us anyway. Now the BK trustee did want to know where those rent checks went and we were very honest and up front about it. If you do a hardship letter (and again I'm NOOOO expert but have learned a little, yet all our circumstances are so different), I would be very general about your renter. They dont need to know specifics unless they ask (IMO). You could say that "rents in general have decreased therefore your ability to sustain the current payment is impossible at this point. You want to work on a loan mod which will benefit you as well as the bank" (if in fact you think a loan mod will solve the probs). But if your current rent is only 1/2 of your mortgage payment, not sure that even the best loan mod will address this (depending on amt, etc). Is interest a factor? If you've got wild interest than maybe.. Anyway, sorry so long. Your post just sounded like "me" about 6 months ago. Pls believe me, not advocating (in anyway, shape or form) BK but speaking to a BK atty may be able to help you put things in perspective, prioritize etc. A good RE atty may help as well, in addition to a good accountant. At first, I had no clue who we needed to talk to... everyone said they could answer a few of my hundreds of Q's but then needed to send me to someone else to figure it all out (grhhh). Our BK atty overall (and we spoke with him about 7 months before filing) was by far (for us) the most informative. Wishing you the best, and sorry so long!
Leigh