Basic Training: E is for Exposure

Posted on July 10, 2019 in Business Transactions

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Remember the days when real estate seemed invincible, defying the laws of gravity? Well, the joke’s on us, and now many real estate investors are scrambling to dump their properties so that they don’t go down the valuation toilet with them.

Q: I bought some property and put 25 percent down; the owner financed the balance. After three years, the mortgage is down to $190,000, but the property may be only worth $190,000. The property is sort of break-even with tenants in, but if I lose them or can’t fill it in the future, it could start to drain me. Can I simply give the property back to the owner?

A.: The extent of your exposure depends on the wording of the mortgage note and other documents that sealed your deal when you bought the property. If you bought it in your name individually, it’s possible that the former owner/current mortgagor could come after your other assets (namely, your other real estate investments) depending on whether you own those individually as well. In these times, the former owner may not want the property back–after all, if you’ve found it enough of an albatross, the former owner might prefer the regular (cash) mortgage payments to owning property on which there will be maintenance obligations and expenses (not to mention taxes). Depending on the interest rate of your owner financing, you might want to explore other mortgage (bank) options–just to get a sense of the going rate that’s being offered. Review the documents with a real estate attorney to get a clear (and realistic) sense of your options–and what they’ll cost you.

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