Make an informed decision regarding property value

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Q: I have owned my building for eight years and have been living in one unit and renting out the other for just as long. I recently moved from my rental property and purchased a house in a different state with my wife and kids. Trying to maintain the buildings has been a challenge since I don't live near the property. I thought about selling the building only to find out that it is worth $100,000 less than what I owe.

I have never been late on a payment. Currently, I have a good tenant, but at a cost. The money I get for rent for both units combined leaves me with $200 a month out of my pocket, not including maintenance. What can I do?

Are there any programs I can use to adjust the value? The property is located on the south side of Chicago. I owe $250,000 and recently a comparative marketing analysis (CMA) completed by a local real estate agent determined the property was only worth $150,000. Please advise -- any advice would be helpful. My family and I are stunned by the situation.

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Q: We're sorry that you have found yourself in this situation. Presumably, you contacted one or more real estate agents to obtain a comparative market analysis (CMA) for your home. That CMA could be accurate given what has occurred the last several years in many real estate markets. That CMA may reflect quite a number of short sales and foreclosures in your neighborhood.

If you know that your neighborhood is still suffering from the effects of the real estate downturn, your property's value will suffer until the market in your area stabilizes. You can try to wait it out and see if buyers start to pick up the homes in your area. Once the inventory of troubled homes diminishes, you might find that real estate values reflect a different reality for your area.

That said, if your neighborhood increased in value to a level that is not sustainable, your home may take some time before you see a value return to a level resembling what you thought your home was worth.

We like that you have good tenants and you might find that keeping these tenants happy and keeping the property one more year may give you some time to figure out if the value for your property is truly as low as you think it is. You are losing over $2,400 per year given what you are charging in rents and what you pay for the costs to own the home. You also lose out on any other expenses you incur in maintaining the home.

While this amount is not insignificant, you didn't indicate what your current interest rate is on your loan. With your good credit, you may be able to refinance the loan. If you go down this route, we'd suggest making sure you talk to a good mortgage lender or mortgage broker to evaluate your options first. More importantly, your ability to refinance is limited. Now that your home's value is lower than the amount you owe on the mortgage, any lender you go to must be willing to refinance your loan given this situation.

Most likely, you'd participate in a Home Affordable Refinance Program (HARP) and you can get more information at You can check if you're eligible at this site. Before you decide to go that route, you still need to see if it makes sense to refinance given your situation. We say that because if you decide that refinancing only changes your situation by $100 or makes you even, you might still decide other options are better for you.

Those other options might be to sell your home in a short sale transaction or to contact your lender and see if they would be willing to take back the property in a deed-in-lieu of foreclosure. While we see many more short sales than deed-in-lieu of foreclosures, the net effect would be to get the lender to allow you to sell the property to a new buyer and release you from the balance of the debt you owe.

If your lender won't release you from the debt in the short sale transaction, you'd have to continue to make payments on that debt to the lender over time. If the burden of that debt is too great, you'd have to file for bankruptcy and pay your creditors off as required by the court. In many instances, lenders would get nothing through the bankruptcy or a fraction of what is owed.

Finally, if the lender does release the debt, the release of indebtedness would be income to you. You owed that money to the lender and the lender would be giving you a gift in the form of a release. The release of indebtedness would potentially cause you a large income tax hit.

Up until December 31, 2013, Congress had passed a law allowing people that sold or lost their primary residences through a short sale, foreclosure or other similar situation to avoid paying tax on that money. However, that law has not been extended as of the date we wrote this story.

And, now that your Chicago property is not your primary residence, you might not qualify to have any release of indebtedness excluded from your income taxes. We don't know if the law will be extended or in what form it might, so whatever decision you make has to consider that you might have to pay tax on the amount the bank releases you from debt.

Given all of these decisions and options, you should sit down with a paper and pencil and outline each option available to you. See how each option might affect you, what each will cost you and where each will leave you. Once you've investigated more about your loan and reviewed what's going on in the neighborhood, you can make an informed decision. You may have to choose from the choice that is least harmful financially to you, but at least you'll make the best choice for you. Good luck.


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