Todd: Hello and welcome to another episode of Todd Miller TV. I’m downtown today at the law offices of Ryan Alexander. Ryan is very prominent and a well-known, knowledgeable attorney here in Las Vegas. Ryan.
Ryan: Thanks Todd.
Todd: Thank you. So here’s a scenario. I’ve seen this. I’m sure some people out there might be in this scenario. Maybe back in the heyday, they got in with some people and bought a whole bunch of rental properties, investment properties. They finance them all to the hilt and they’re all upside down.
So maybe they’ve got five, ten or however many properties. Their personal finances are all good but man they’ve got all these rental properties with loans on them. What are their options and really how can they resolve this?
Ryan: OK. Well, there’s a few different ways we can look at it. The first choice to make is, “Do you want to keep the properties?” If you’ve put all this into it, how badly do you want to keep them? If you want to get rid of them all, it’s easier. If you want to keep them, it’s a little more difficult step. So we will start with if you want to get rid of them all.
Ryan: The first things you’re going to look at are short selling the property.
Ryan: And it will go to you and discuss the short sale.
Todd: OK. So if they wanted a short sale, they could come to us.
Todd: So that’s one option. They can come to us for a real sage that we could short sell the properties for them, get them out of them with maybe some recourse, maybe not, who knows.
Ryan: Well, and the legal side of the short sale is that the short sale contract that they’re going to sign with the bank includes language that should get them out of the deficiencies or any obligations for the mortgages so that they’re not liable for what’s left over.
One of the things to look for in your short sale contracts as you know or just for the viewers is to make sure that the short sale accommodates any second mortgages that you have because you have to take care of the second and most contracts are pretty fair.
They will give the second something to satisfy them but it’s usually $5000 to $7500 and it pays them off but you have to get both parties to agree, both banks on the first and the second. So I often tell people who are considering that even though I don’t execute the sale. I tell them it’s a lot easier if for example Bank of America holds the first and the second than if it’s an independent party like IndyMac or Aurora holds the other second and you’ve got Chase or Bank of America on the first. But that short sale contract is supposed to get you out without any obligation left over afterwards.
Todd: OK. So I’m guessing another thing they could do is just throw their hands up and say, “Forget it,” and just let them all stop making the payments. Let them all foreclose. So they could do that. Would bankruptcy be another option and could they do a bankruptcy of some kind to strip all those off?
Ryan: They can. Yeah. For most investors, if you have multiple properties, it’s probably going to be a chapter 11. You could do a chapter 13.
Todd: What’s the difference between 11 and 13?
Ryan: They’re both reorganization bankruptcies but it’s more of a difference in scale.
Ryan: Thirteen is for a person who has less than a million dollars in investment properties so that actually their obligations are less than a million dollars. But also it’s a little tighter restriction on how soon and how much that needs to be paid back in a chapter 13.
So for a smaller investor who has mainly condominiums or small homes that are under $100,000, it may make sense to do a chapter 13 even if they have multiple properties, if they have smaller properties. What we’re finding lately is that a lot of investors, if you have two or three regular-sized homes in Clark County, that’s over a million dollars in debt and you’re forced into the chapter 11 category rather than a chapter 13.
Todd: This is a good point. So say you bought five properties. You pay 300,000 for each one and you got 100 percent financing through this lender. So you have $1.5 million in debt. Those houses are today worth 100 grand each and I know some examples where that happened. So you really only have $500,000 worth of property but you have $1.5 million in debt. Is that 11? Is that 13?
Ryan: That would still be an 11 because what’s going to disqualify you from the 13 is the amount of the debt, not the value of the properties. I wish it were the other way around because we could do a 13 easier but no, it’s going to be calculated based on the total amount of the debt, which are the liens and the obligations.
So you’re looking at an 11. What that’s going to do, the upside of the 11 is that if you own a million and a half in properties and they are worth $500,000, we can get the court to approve basically new mortgage commitments for $500,000 going out for 30 years at a new set of interest rate. Right now at the end of 2010, they’re pegging it at about 5 to 5.5 percent.
Todd: So it’s possible that if a person has got rental properties, they want to make it work meaning they want to keep the tenant in. They want to collect rent and they want that to be an investment. They can go through this process and have that. Loan is not principal-reduced. It’s just the terms, right?
Ryan: Well the terms are going to be changed that you’re only paying the market value, the current market value. So essentially there is a secured portion of the note and an unsecured portion.
Ryan: So whatever you owe that’s above the market price, you’re not going to pay them zero but you’re only going to pay them a small amount over five years.
Todd: OK. So obviously somebody would have to come in and go through their specific examples because it might be that even after doing that, there’s still negative cash flow and it still doesn’t make sense.
Ryan: Well the biggest question whether it makes sense to do a chapter 11 is, “If your mortgage payments could be based on market price, would your rental income cover it?” Because if your rental income right now as a snapshot in time wouldn’t even cover what a market price payment would be, then you can’t qualify for an 11.
Todd: I can tell you almost certainly that if you pay market value interest rates on the market value loan, it certainly will make sense because home prices are a third and rents haven’t gone down that much. So yeah, that house is probably getting $1200 a month rent and for $100,000, if that’s what it’s worth, if you really bought it for 100 grand, I mean all your payments combined would probably be 800, 900 bucks. You would have profit in there.
Todd: There would be $300 a month. If somebody wants to meet with you and have a consultation and find out more about their specific situation, what do they do to get in touch with you?
Ryan: They can call me at 868-3311 and I meet with everybody personally. I will go over all the requirements of different chapters of bankruptcies and which one fits what they want to do.
I will also tell them not only what do they want to do and which type of bankruptcy would fit, but looking at it rationally without being emotionally involved in their financial affairs, looking outside in, what makes sense for them because it’s their hard-earned money. They are emotionally connected to the properties because it was what they spent their life savings. A lot of people put their life savings down and buy rental property and we have to take a cold, hard look at it. OK. What makes the most sense now?
I guarantee everybody that I will tell them exactly what they should do based on their financial situation.
Todd: Good. Well, thank you very much.
Ryan: Thank you Todd.
Todd: That’s the episode for today. If you have any questions, you can find him online RyanAlexander.us, his website. Everything is on there. Thanks for tuning in and I will see you on the next episode.