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I have two Florida condos. In 2005 I had a small condo paid off and then purchased another condo with a mortgage to live in while I rented out my old one. I planned on holding both and watch both go up in value, but everyone knows what happend to the South Florida condo market. I ended up taking out a line of credit on my first condo so I could cover expenses. I watched the market go down further so I maxed out my line of credit because I was afraid the bank would reduce it. I have made all payments on both properties so far and plan do to so as long as I can, but if interest rates soar next year and the condo market does not recover with it, I will have a difficult time making ends meet, especially with the scarey job market. At this point I owe way more on both properties then I could sell them for. If I had to let one go or try to sell short it would be my first one, but since it is a HELOC and not a fixed mortgage like my second one, will rules on short sales and the way the bank negociates with me be the same? I hear of people being able to make deals with banks because they are way upside down on their mortgage, but not their HELOC. Does anyone know if this is seen as the same thing? I do not want to get stuck with tax issues later either. Any advice is appreciated
I have used some of it to make ends meet and to keep afloat with 2 upside down properties. The rest I have in a savings and I will continue to pay both properties as long as I can. I am just concerned about the job market and rising interest rates. If (GOD FORBID) I lost my job along with my payment on the HELOC increasing, I would probably only last a few months before some had to give or I sold something. My first choice would be to short the condo with the HELOC, but am not sure if that is possible. My second condo is a traditional fixed mortgage and I put 12% down in 2005. I am not one of the people that did a ZERO DOWN then quit paying when the teaser rates expired. I am hoping that works in my favor.
The way I read your situation you have more to worry about than a short sale.
When you have a free & clear investment property and then you take equity out of it via a HELOC the lender generally does so with the assumption that their lien is really "in first postion". Sounds like you are probably OK but if I were in your shoes I would be reviewing EVERYTHING to make sure that it is clear the lender understood this to be an investment property. Worst case they could be coming after you for fraud. Even w/o fraud the leniency that lenders feel toward homeowners is generally far different than toward investors...
Get you ducks in a row, prepare for the worst. I really hope that there are some buyers that might be enticed to buy either of your condos. If you know the status of the complexes with regard to FHA eligibility that is another piece of info that MIGHT factor into your strategy AS WELL as the actions that your lender might pursue...
Why did you put borrowed money into savings? That is a losing proposition. You probably need to really rethink a whole bunch of stuff before you contact either lender because from what you are saying too many things are going to make it too easy from them to lump you into "no hardship" category and that won't help you at all. Believe it or not the "record" of borrowers quickly defaulting after unrealistic teaser rates expire is not all that much harder for lenders see through than that of ANY BORROWER whose expenses don't meet their income...
Hindsight: NEVER tap equity to cover expenses. I would bet that had you SOLD instead using a HELOC from the fully paid off property you would have been in a whole different situation now... Live and learn.
Thanks for our helpful response Chet. I will mention that yes the HELOC bank new it was investment proprty from the start and even wanted to see copy of my current lease. I have reported the income on my taxes and have done everything legal, as far as I know. I put the balance of my HELOC in Saving for lack of knowing what else to do with it while I pondered my situation. I heard rumors banks were cutting HELOCs as property values declined and it was correct. The last 100.00 or so I had, has been cut off. I do not see an immediate problem and I should be ok through next year, but as you said, I am starting to get my info ready so my ducks will be in a row. I think worst case, I could sell my newer condo short, then re homestead my original and move back in. I do not want to go with that option, hopefully the market will recover faster then I expect and I will not have to make decisions like that....btw what do you suggest I do with my money in savings while I ponder my situation?
I'm in a similiar situation and from what I understand you cannot re homestead a property. I hope you get some more answers, I owned a home w/ no mortgage in Fl, used a HELOC to buy 2nd home and I LOVE the second home and hope I can sell Fl and cover the HELOC....but....like you...I want to know if they would consider a short sale or renegotiating the payoff if I owe more on the HELOC then the house is worth. Good luck and I hope we can find some answers!
The best use of HELOC is to pay for something that will be paid off quickly and with an income stream that you are reasonably certain of.
To just put borrowed money into a bank you will almost certainly end up in a very bad way. Banks do not pay more interest than they charge for very long and remain in business...
The OP is facing a classic "burn rate" situation. Their income is insufficient to cover their debts. Unless that changes before the cushion they have of borrowed money is gone they will be broke. Knowing the gap between inflow and outflow and the rate that gap is growing (or shrinking) is critical.
if either side can be changes (so more money comes in or less goes out) then their might be a way out. Otherwise ...
I don't know if the bank will approve a short sale in those conditions. I would guess not. But if they do, the debt they forgive would be non-qualifying debt for the waiving of taxes, so you would owe income taxes on any forgiven debt just as if it were regular income. In order to qualify, the debt must be on an owner occupied property, AND it must either be original debt taken out to purchase the home, or money taken out later and spent entirely on home improvements. You don't meet either of those criteria. So even if you are able to convince the bank to sell short, you won't be able to avoid the tax consequences.
You brought up a point I had not thought about LiveLoveLaugh. I had always assumed my worst case would be move back into my original condo for 2 years to avoid capital gains. If it can not be re homesteaded, that is an issue I had not thought of. If anyone can comment on that, I would appreciate it.
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