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  1. #1
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    Aug 2009
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    Default Rental Property Foreclosure in California, Recourse vs Non Recourse

    My question involves a foreclosure in the State of: CA

    I am thinking how to deal with my rental property in Merced, CA.

    In year 2004, my husband and I purchased a rental property in Merced for $310K. We put approx $40K for down payment. We got a 5 year interest only ARM loan of $170K, and we also borrowed $100K on an LOC we got it out from our primary house.

    We can deal with the $100K LOC. My question is on the $170K loan.

    The property value dropped down to around $110K this year. We are still paying interest only on the $170K loan. However next April our 5 year interest only payment is up so we will have to pay interest plus principal. Although we have a tenant renting the property now but the rental income is not enough to cover all the expenditures. We cannot afford the payment when we have to start paying principal next year.

    If we sell the property now, the value dropped so much that will we have to pay out of pocket approx $60K (170K - 110K) to sell. We do not have that much cash.

    If we foreclose this property, Here are the questions I am worrying:

    1. The fair market value of the property is only $110K and I owe $170K on it, I will have to claim $60K in income on my federal taxes if the bank can only sell it for its fair market value. Am I correct? what kind of tax consequences will I be looking at? (The property is not principal residence)

    2. Is there anyway that the lender can come after me for the difference for a Recourse loan? I heard they can come after me for Recourse loan but I also heard they cannot in CA State. I am confused.

    3. If the bank can come after me for the difference later, we shouldn't foreclose it. Do you have other expert advice on my situation?

    I appreciate your help and thank you in advance.

  2. #2
    Join Date
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    Default Re: Rental Property Foreclosure in California, Recourse vs Non Recourse

    If I understand you, this was from the start an investment property? So it's a recourse loan. They can come after you for the arrearage, but it should be dischargeable in bankruptcy or in Chapter 13 you could cram down the debt to market value with the balance being treated as unsecured (if you're considering that possibility).

    You would pay taxes on $60K in income in the same manner as you pay taxes on the rest of your income - calculate your taxes with the extra $60K to determine your exposure.

  3. #3
    Join Date
    Sep 2009
    Location
    Salinas, California
    Posts
    1

    Default Re: Rental Property Foreclosure in California, Recourse vs Non Recourse

    Quote Quoting jshum
    View Post
    My question involves a foreclosure in the State of: CA

    I am thinking how to deal with my rental property in Merced, CA.

    In year 2004, my husband and I purchased a rental property in Merced for $310K. We put approx $40K for down payment. We got a 5 year interest only ARM loan of $170K, and we also borrowed $100K on an LOC we got it out from our primary house.

    We can deal with the $100K LOC. My question is on the $170K loan.

    The property value dropped down to around $110K this year. We are still paying interest only on the $170K loan. However next April our 5 year interest only payment is up so we will have to pay interest plus principal. Although we have a tenant renting the property now but the rental income is not enough to cover all the expenditures. We cannot afford the payment when we have to start paying principal next year.

    If we sell the property now, the value dropped so much that will we have to pay out of pocket approx $60K (170K - 110K) to sell. We do not have that much cash.

    If we foreclose this property, Here are the questions I am worrying:

    1. The fair market value of the property is only $110K and I owe $170K on it, I will have to claim $60K in income on my federal taxes if the bank can only sell it for its fair market value. Am I correct? what kind of tax consequences will I be looking at? (The property is not principal residence)

    2. Is there anyway that the lender can come after me for the difference for a Recourse loan? I heard they can come after me for Recourse loan but I also heard they cannot in CA State. I am confused.

    3. If the bank can come after me for the difference later, we shouldn't foreclose it. Do you have other expert advice on my situation?

    I appreciate your help and thank you in advance.
    The law in this area is tricky and there is a good deal of money at stake. You should speak to an attorney who specializes in Real Estate Law. That said, I will give you my take.

    Whether you will be subject to a deficiency judgment will depend on whether the lender is willing to go through a "judicial foreclosure". It is very uncommon for them to do so because it is expensive and time consuming.

    I believe 580(d) protects you from deficiency if they just sell using the power of sale in the deed of trust. I pasted the code below. I included 580(b) because if the seller of the property holds the mortgage, and if they are selling under the power of sale clause in the deed, you may have an out based on this language in 580(b)

    "...trust or mortgage given to the vendor to secure payment of the
    balance of the purchase price of that real property or estate for
    years therein..."

    Good Luck to you, you are not alone in this - many, many, many others are suffering with you, for what consolation that can bring...

    580b. No deficiency judgment shall lie in any event after a sale of
    real property or an estate for years therein for failure of the
    purchaser to complete his or her contract of sale, or under a deed of
    trust or mortgage given to the vendor to secure payment of the
    balance of the purchase price of that real property or estate for
    years therein, or under a deed of trust or mortgage on a dwelling for
    not more than four families given to a lender to secure repayment of
    a loan which was in fact used to pay all or part of the purchase
    price of that dwelling occupied, entirely or in part, by the
    purchaser.
    Where both a chattel mortgage and a deed of trust or mortgage have
    been given to secure payment of the balance of the combined purchase
    price of both real and personal property, no deficiency judgment
    shall lie at any time under any one thereof if no deficiency judgment
    would lie under the deed of trust or mortgage on the real property
    or estate for years therein.



    580c. In all cases where existing deeds of trust or mortgages are
    judicially foreclosed, unless a different amount is set up in the
    mortgage or deed of trust, and in all cases of mortgages and deeds of
    trust executed after this act takes effect, the mortgagor or trustor
    may be required to pay only such amount as trustee's or attorney's
    fees for processing the judicial foreclosure as the court may find
    reasonable and also the actual cost of publishing, recording, mailing
    and posting notices, litigation guarantee, and litigation cost of
    suit.


    580d. No judgment shall be rendered for any deficiency upon a note
    secured by a deed of trust or mortgage upon real property or an
    estate for years therein hereafter executed in any case in which the
    real property or estate for years therein has been sold by the
    mortgagee or trustee under power of sale contained in the mortgage or
    deed of trust.
    This section does not apply to any deed of trust, mortgage or
    other lien given to secure the payment of bonds or other evidences of
    indebtedness authorized or permitted to be issued by the
    Commissioner of Corporations, or which is made by a public utility
    subject to the Public Utilities Act (Part 1 (commencing with Section
    201) of Division 1 of the Public Utilities Code).

  4. #4
    Join Date
    Jul 2009
    Location
    Cinnaminson, New Jersey, United States
    Posts
    205

    Default Re: Rental Property Foreclosure in California, Recourse vs Non Recourse

    You are dealing with a sticky situation... which is nothing you don't already know, but it would definitely be worth a few hours of an attorney's time so you are fully aware of all your options and the corresponding consequences.

    It does seem like a disproportionate amount of money to pay out every month versus the amount that you have lost in equity. Exactly how much negative cash flow do you have between the rental income from your rental lease and your expenses?

    If it is any consolation, median home prices went up for the first time in three years last month... have you calculated exactly how much you need to keep things afloat? Can you raise the rent? Cut costs? Rent the garage?

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