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Duplex with Tenants Has Negative Equity. What to Do!

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Hi Everyone,

 

Has anyone have any experience with this?

If a property has negative equity, (a duplex) what would you do?

Walk away, try to get the property???

 

The reason I ask this question is because I found a property with an out of area owner that has negative equity/upside down on their mortgage and wasn't sure if I should even consider pursuing this property. I am in communication with the ownersand they want their headache gone.

 

My lawyer has drawn up documents that will allow me to take over paying the mortgage, collecting rents of $2700/mo. to pay a mortgage 0f $2263.00/mo. I would also have power of attorney with right of first refusal.

 

Any advice or input is greatly appreciated.

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Charles, what do the owners want to do? What do you want to do? Buy it outright, long term lease option? How much negative equity are we talking about?

Some more info would be helpful.

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Hi Michael,

 

I would love to keep this for myself. I have spoken with the owner's who live in Alberta and the property is in British Columbia. The owner's want this problem gone! I will take over paying the mortgage from the rental income. The mortgage comes due in 2016 and I have the right of first refusal. My lawyer's documents allow for this!

 

If necessary, I will create a joint venture to hold this property. The market is pretty flat in that part of BC; however, I think it will bounce back. This is the Napa Valley of BC. The mortgage balance is $477K, the property is underwater $50K.

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In addition, the PITI is $2433/month. Rents are $2700/month and the utilities are paid by the tenants.

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Charles, so you'll be receiving a $250/mo cash flow while purchasing a property that is $50K upside down? When I look at the risk to reward ratio, I'm not feeling warm and fuzzy. Appreciation is never a sure thing. So while you may be optimistic prices will increase, if they don't what are your options for getting new financing when the current loan comes due in 2016?

Another concern: a vacancy of any kind kills what little cash flow you're expecting.

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There are 2 options I have thought about. I will share the one I like the least. Walk away from the propery and let the owner do a short sale. This will wreck their credit for about 3 years. Less than positive feelings on my part about that decision!

 

The one I prefer is to discuss owner financing and using a wrap. The market here is currently flat, however; I am stoked about getting a duplex with only $10.00 up front! My risk-tolerance is high and I want this property for my first buy (Get) and hold!

 

Since I would have been managing the property for three (3) years and removing there "headache", keeping an open and communicative relationship with the owner, and not backing out, I think we can come to an agreement that will be a win for all concerned.

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Well, Charles, it sounds as if you've thought this through and are aware of the risk-reward ratio. For $10 down and knowing the pros and cons, if you can strike a deal I say go for it.

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Hi Michael,

 

July 1st. is Canada Day. Happy Canada Day to Canadians on this site. Similar to July 4th.in USA.

 

The owners and I have reached an agreement and I now have this property. I'm happy with this deal and I recognize the risk involved.

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Happy Canada Day, indeed!

Charles, congratulations. You did your due diligence and did the deal. Way to go. So what is the exit strategy?

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Keep the property rented, raise rents next year if that makes sense and purchase the property when the mortgage comes due in 2016. Buy and hold for long term appreciation and my retirement fund.

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