The Downward Spiral of Financial Death
Every week I talk to countless real estate investors. They may be my customers, sellers of properties, or even just people I run into. As you can imagine, many of the investors that bought properties at the top of the market (2003-2007) are evaluating their options. Most are simply going to hold on, keep the property rented and expenses low and wait out the drop in value. Others that had a blip in their financial lives and can’t support the property any longer may need to do a short sale or let it go to foreclosure.
Then there are a few other investors. These are the ones that have just simply decided that they are tired of dealing with the property (not for financial reasons). I am amazed at this group. Because of the glut of short sales and foreclosures, these investors think that is not a big deal to let their property go. In fact, they are almost cavalier about it saying: “I am so sick of this property, I am just going to let it go back to the bank. Everyone is going to have a foreclosure on their record shortly so it won’t affect me very much.”
This true story goes out to all those cavalier investors that think life is just going to be fine if they let their property go to a short sale or foreclosure, simply because they are tired of dealing with it (not for financial reasons).
Mike (not his real name), an acquaintance of mine, bought 5 properties in 2004 & 2005 from another Minnesota Investment Real Estate agent that really didn’t care much about Mike. He bought some single family houses and some duplexes. While Mike is not in the cavalier group, he did make some rookie landlord mistakes along the way in managing his properties. He didn’t evict some tenants as early as he should and then held out for too high of rent often, resulting in vacant units. All in all, he was a decent real estate investor.
Unfortunately, Mike is self-employed and the downturn in the economy hit his business hard. Mike had some vacant units and with the downturn in his income he had to miss 2 mortgage payments in a row on each of the 5 properties. He is making his payments again and has worked out a repayment plan for the payments he has missed (an additional amount each month for the next 8 months).
As I mentioned, the cavalier investors think it is no big deal to have a short sale, foreclosure, or just missed payments on their credit. Maybe it isn’t a big deal, but here is Mike’s account of how those simple missed payments (not even a short sale or foreclosure) have affected Mike’s life:
- Despite setting up a repayment plan, Mike’s phone rings almost every morning at 8:00am with a call from one of the mortgage companies asking when he will be paying his missed payment. He explains he is on a repayment plan and the caller (usually from India) reads their screen more and finds that information.
- At least once per month he receives a collections letter from one of the 5 mortgage companies stating he missed his repayment plan. Again, he has to take time, call them and sort it all out with a person in India.
- The missed payments have hit his credit report. Surprisingly his credit still shows a 650.
- He received a letter from American Express stating that they are reducing his credit limit from $15,000 to $1 above his current balance of $2000.
- Mike has a business credit card from US Bank that he uses almost daily for buying supplies, charging purchases on-line, and entertaining clients. US Bank also sent him a letter reducing his credit to $10 above his current balance. His ability to produce income in his business is being threatened.
- The lease on his vehicle was up shortly after the missed payments. Although he had a stellar payment record previously, no company would give him a loan or lease for a new car. He had to have his parents buy the car and he now pays them.
- Despite having a mortgage rate on his personal house of 6.5%, he can not refinance to save himself money because of the black marks on his record.
While I am not suggesting that you should not do a short sale or let your investment property go into foreclosure, make sure you are doing it as the absolute last resort. Mike will tell you that it is no fun constantly wondering where this downward spiral will end.
Congratulations, Scott on the Carnival of Real Estate win.
I enjoyed reading your article.