Landlords seek chapter 13 relief

Landlords seek chapter 13 relief

TWO different clients both landlords because they both own rental properties came to see me last week with different problems.

The conventional wisdom why people buy rental properties has two points. First, the rental properties will provide a steady stream of monthly income to the landlord. Second, the value of the properties will eventually rise, thus making the landlord rich in equity, like Donald Trump. The problem is that in reality many things can go wrong with rental properties. For instance, rents may not be able to cover the monthly expenses, and there are quite a few expenses particularly repairs and maintenance. If this happens, instead of having a steady stream of monthly income, the landlord is faced with financing a monthly loss. Facing continuous monthly losses, landlord will either have to pay for the monthly loss from his own pocket, or borrow money to finance the loss. A $1,500 monthly loss translates to an annual loss of $18,000. Landlord is then squeezed between a rock and a hard place. Should he continue being a landlord and lose another $100K in the next 5 years? And another question is, if the equities in the properties are rising, can the increase in equities offset the yearly loss? Let’s say that after 5 years of eating the yearly loss of $18,000, landlord is out $90K but on the 5th year his/her equities in the properties have increased by $200K, then landlord will be ahead by $100K on the 5th year.

On paper, that seems to be a logical way of looking at it. But in real life, it’s not that easy to keep on eating the annual loss. This is what happened to my first landlord client.

Chapter 13 to abandon rentals

In her case, she sold her residence about 8 years ago, just before the burst of the housing bubble. She made a net of $300K from the sale of her residence. She then put $100K down on a new residence, $100K on a rental with 4 units, and the last $100K on another rental with 4 units. At that time all real estate prices were sky high. So, although she made $300K on the sale of her old residence because the price was sky high, she also bought her new residence, and the two rentals also sky high. Now, 7 years hence, there’s no problem with the new residence, which has equity of $400K because her new residence is in a high demand area where foreigners are paying 100% cash for a limited number of houses.

The first problem with the rentals is that they are negative every month because she has many rental expenses: property management, constant repairs, gardening, maintenance, taxes, and the mortgage payments are hefty. She’s negative almost $2K a month for 8 units. The second problem is that after 7 years, the properties have no equity. Therefore, after 7 years she lost $168K to pay for the monthly loss of $2K, and she also lost her $200K downpayment, making a grand total loss of $368K for 7 years! Now, she wants to retire and be rid of the rental properties because as she said “I already lost all of my $120K savings, and the $200K downpayment, I have to keep on borrowing money to cover the loss, I just want to retire now without this problem.” “I want to get rid of the two rental properties, but I want to keep my residence, this is what I want to do.”

After analyzing her situation thoroughly, I suggested a Chapter 13 to abandon the two rentals at the right time. One rental had to get foreclosed first, or a “deed in lieu of foreclosure” instead, whichever is faster; otherwise, her secured debt level would be over the limit for Chapter 13. She could then abandon the other rental in her Chapter 13 plan. She could not file a 7 because her equity in the residence was $400K. In any event, the Chapter 13 will implement her desire to get rid of the rentals without owing any money on them. Because she has large equity in her residence that is over $175K, she would have to pay her unsecured debt of $30K over 60 months without interest resulting in a plan payment of about $500K a month. After 60 months she would be debt free but she would be immediately free of the two rental properties without further liability. This is exactly what she wanted, to retire without financial problems.

Chapter 13 to stop foreclosure and keep rentals

In the other case, client sold her house five years ago and used her net proceeds of $100K to buy a 4-unit apartment. She rents out 3 units and lives in one unit. She breaks even monthly. The problem is she’s having a really hard time paying the first mortgage because husband retired last year. The bank modified her mortgage after her husband retired but the modified amount is still a burden for her. Now she wants to make one last attempt to further modify the mortgage payment. The problem is the bank has set a foreclosure sale for the property in 10 days. She has not paid the mortgage for 12 months and now has a large default of $100K. However, she wants to stop the foreclosure because she believes that she will be able to get a reasonable modification shortly. Certainly, the only way to stop the foreclosure on its tracks is with a Chapter 13 petition.

“Now after six days, Jesus took Peter, James, and John his brother, led them up on a high mountain by themselves; and He was transfigured before them. His face shone like the sun, and His clothes became as white as the light.” – Matthew 17:1-2

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.

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