How Do I Fix This Mess?Posted on May 3, 2011 by
Since 2005, we’ve warned investors about the dangers of going to banks to get short-term financing on their real estate investing deals. (By “short-term financing,” I mean any financing with an adjustable interest rate and/or a term of less than 30 years.)
For the past six years, Kim and I have financed our deals through owner financing or using private money lenders – except for two idiotic, short-term bank loans we foolishly did in 2008.
I’m a real estate professional who is supposed to know what he’s talking about. So in 2008, when I claimed real estate values had bottomed out and that it was time to buy, I believed me.
At the April 2008 foreclosure auction, we bought an investment property off Jones Mill Road for $88,000. It was worth $125,000. The next month, after Kim did the Short Sale, we bought a house off Bishop Road for $85,000. It was worth $136,000. Two good deals, right?
Our exit strategy for both properties was to find lease/option tenants who would buy the properties within 18 months after moving in. Our combined profit from these two deals would be $88,000! Cha-ching – daddy’s a money machine!
Since both properties were loaded with equity, and since I thought the real estate market had hit bottom, I decided that it was safe to get short-term bank financing on these two properties. I borrowed about $93,000 on each house. They were 7% interest-only loans that ballooned in August 2012.
Fast forward to today. As we all know, the real estate market did not bottom out in 2008. The Jones Mill Road house is now only worth $85,000, putting me upside-down in this property. The Bishop Road property is now worth $110,000. So much for daddy being a money machine!
With two short-term bank notes ballooning next year on properties that are continuing to fall in value, how would YOU fix this problem?
The key is to take immediate action. Don’t sit around as a deal (or a tenant) goes from good to bad. Lay out a sound plan and then follow it!
The first thing we’re doing is putting the Bishop Road property up for sale in May. We should walk away from this deal with $10,000 in our pocket.
The Jones Mill Road property is going to be trickier because we’re upside-down – we owe more than what it’s worth. So, we will use our savings to pay off our note to the bank – OUCH! Next, we’ll sell the property for about $85,000 and eat the loss.
After selling these two properties, we should end up about even; the profit from Bishop will offset the loss from Jones Mill.
So how do we replace these two properties and turn this back into a profitable deal? Simple – the same market that drove down the values of these two properties also drove down the values of all the properties in the area. Because values are so low, it’s a great time to find a pennies-on-the-dollar deal!
We will find two good $100,000 houses that we can buy for $40,000 each. We’ll finance these two deals by getting owner financing or by bringing in a private money lender. With this strategy, we’ll convert two properties with bad, short-term institutional financing into two better properties with great, long-term, private money financing.