New York -- The most painful decision a real-estate investor can confront is when, or whether, to bail out of a property that is bleeding cash. Your rents don't come close to covering your costs. But if you sell, you may realize an enormous loss. To pay off the bank, you may have to fork over even more cash than you've put up already.
In many cases, these strapped investors could beat the rap if they could only refinance. Replacing their 11 percent mortgages with loans costing only 7 percent might put their budgets back on track.
But to refinance, your property generally has to be worth 10 percent more than the mortgage against it. Tens of thousands of homes, apartments and condominiums cannot meet this test today.
I know of at least one refinancing program for people with zero home equity (meaning that your house is worth at least the same as the mortgage loan against it). To qualify, you have to pass some further tests, including:
* You possess the same stable job and good credit rating that you had when you first bought the house.
* Your original down payment was at least 20 percent.
Only fixed-rate loans are available, for 10, 15 or 30 years. You pay 0.75 percent to 1 percent over normal market interest rates. This program is currently being offered through 167 lenders nationwide; for their names, call Countrywide Mortgage Conduit in Pasadena ( 669-2300).
Countrywide's Laura Lippman asked me to give you the following warning: The phone lines are swamped; these special loans are being made by participating lenders, not yet by Countrywide Funding itself; the huge demand means that response time has been very slow.
Rep. Joseph Kennedy II, D-Mass., is preparing a bill to help creditworthy borrowers refinance, even when they don't qualify under normal standards. The details haven't been worked out, however, and the bill's prospects in Congress are unclear.
In the meantime, small investors and home owners keep making the rounds, looking for refinancing or advice.
Take David and Linda Amendola, who own three small rental properties in Waterbury, Conn. One property has a decent amount of equity left and is more than covering its costs. The second is running at break-even. But the third, a four-family house, is "under water": down 33 percent in value since 1990; worth about $25,000 less than the mortgage against it; usually only partly rented; and costing at least $400 a month to keep afloat.
If the Amendolas could refinance their 10.75 percent mortgage, they'd save about $400 a month -- so the property would just about carry itself.
But they can't find a lender. "I called 30 places," Linda says, but no one wants "under water" loans.
A lawyer advised the Amendolas to quit making their mortgage payments. On the eve of foreclosure, the lawyer asserted, their lender would relent and refinance.
"That's a dumb idea," retorts John Reed, of the Real Estate Investor's Monthly in Danville, Calif., "although I hear it suggested a lot today." If the Amendolas quit paying, Reed says, they will ruin their credit rating. Furthermore, the lender might very well foreclose, then move against their other properties for the remaining money owed. At a forced sale, the prices on those other houses might drop by 15 percent to 20 percent.
The Amendolas asked an accountant to run some "what if" scenarios -- what if they dug into their remaining savings in order to refinance their bad apple; what if they borrowed more against their other property; what if they sold the bad property and used their savings to pay off the bank.
All good questions -- but as it turned out, their accountant didn't know enough about real-estate restructuring to give good answers. This, too, is common. Small real-estate investors often don't have access to the best advice. One idea: Try a real-estate broker who's also a Certified Commercial Investment Member (CCIM), and more experienced in properties like these. For a free national directory of CCIMs, call R. J. Sirois at (800) 621-7027, ext. 4494.
To investors with these kinds of troubled properties, John Reed has this advice: Lower the rent, to keep the house filled up. Don't get delinquent on any of your mortgages. Don't walk away if you can possibly avoid it (and especially if you own other assets). Use your savings, or refinance other properties, to help dig yourself out of your hole. Keep your lender informed.
And recognize that you do owe the money. Your only choice is to pay it in the least painful way.