Guest blog: short sales and Illinois landlords

Chicago rental buildingShort sales?  Why talk about short sales?  I thought this was a blog about landlording.  Well, short sales are becoming an increasing reality for some Illinois landlords.  Regularly, I hear tales of woe from landlords living on the brink of foreclosure; landlords who need their tenants to keep paying rent in order to to keep them out of collections.  When those tenants stop paying, the landlords fall behind.  Oftentimes, landlords call me too late in the game – after the tenants are too far gone and will never catch back up and long after the system cannot compensate the landlord for the tenant’s failure to pay rent.  From there, things spiral.  Foreclosure notices are mailed to the rental property and are received by tenants.  The few tenants still paying rent stop paying and the rental building becomes a black hole.  More debt.  More taxes.  More expenses.  Maybe even new building code violations as tenants begin to abuse the building that they live in but don’t pay for.  Can it be avoided?  In this real estate market, it might be possible to find buyers for a property.  The only problem is that the property might be “underwater”.  Maybe a short sale is the answer.  A short sale is merely a sale transaction where the lender or lenders who have liens on a parcel of real estate allow the owner of the real estate to sell the property for less than the lien amount.

My guest blogger, Michael Michalak is a real estate broker for RE/MAX Signature.  He writes on the topic of short sales:

Short Sales for Illinois Landlords – one man’s story – by Michael Michalak

Michael Michalak

This blog installment was inspired by a client of mine named Marco (names have been changed to protect the innocent!).  Many landlords all over Chicago are living a story similar to his.  Marco owned a 4-unit rental property he purchased at the height of the real estate market in 2005, a majestic brick building that had been fully rehabbed by the former owner.   The four new apartments showed great promise as the building was close to transportation and a university.  Developers were buying older buildings in the neighborhood and converting them to condos.  Projected rental income from the building was very good.

Shortly after, life really changed for Marco.   His company downsized and moved from Illinois to Texas.  He was offered a job at the new location, but with a significant reduction in pay.  Additionally, at the building, expenses seriously outweighed rental income.  Two of Marco’s four apartments were still unrented and maintenance costs were starting to pile up.   Marco used up all of his small savings and then started to cannibalize his 401K to pay the mortgage and taxes each month.

To make matters worse, the neighborhood started to gentrify in the other direction.  Older buildings that were converted a year ago now became board-ups and targets for scavengers and crime.   Marco’s property value was definitely underwater by now.  How would someone pay $500,000 for a 4-unit when they could find a short sale or foreclosure property like it for $200,000 or less?

Then, one of Marco’s tenants moved leaving only one tenant in the building.  Just when Marco thought things couldn’t get worse, scavengers broke into the building next door and stole the copper piping that supplied water to the building.  As is common when scavengers strip a property, the water is not shut down.  After the scavengers left, the building’s basement started filling up with water.  After several hours, the water level was so high it actually started flooding the basement in Marco’s building.   It was found that a long forgotten common pipe connected the two buildings and had allowed the water to fill both basements.

To make a long story short, Marco knew that something had to be done.   The building would continue to bleed him slowly and there was no sign that the rental or sale market was rebounding.  He contacted me and we started working on a short sale for the building.  In six months, we had found a buyer willing to pay $160,000 for Marco’s building and we moving towards closing.  This price was $340,000 less than Marco originally paid.  The short sale attorney had negotiated that the bank would write-off over $300,000 that was owed on the mortgage after the sale.

When the short sale was completed, Marco was able to get rid of a property that had been a huge liability for him for over two years.  The bank wrote off the bad debt and the new buyer assumed responsibility for the building.  Marco lost money, but it could have been worse.  Had Marco acted sooner, he could have cut his losses even further.

The bottom line is that things don’t have to get this bad before a landlord takes a step back to consider all options.   Banks are becoming more and more willing to work with property owners on short sales, mortgage modifications, and other programs.  A divorce, job loss, or health issue may push property owners towards insolvency.  Even one non-paying tenant can tip a landlord, living paycheck to paycheck, over the edge.  If you or someone you know is facing this same situation, have them talk to a real estate professional early in the process, before it is too late.  These kinds of problems are all too common these days as mortgage statistics show 1 in 4 homeowners are at least one payment behind on their mortgage.  One of the best parts of a short sale is that there are normally no out-of-pocket costs involved with the process.  Usually, the mortgage lender will allow the fees for the real estate agent and attorney’s services are paid for out of the proceeds of the sale.

RealtyTrac recently reported that foreclosure activity in the U.S. to be at a 44 month low.  From the article,

“July foreclosure activity dropped 35 percent from a year ago, marking the 10th straight month of year-over-year decreases in foreclosure activity and the lowest monthly total since November 2007,” said James J. Saccacio, chief executive officer of RealtyTrac.

“This string of decreases was initially triggered by the robo-signing controversy back in October 2010, which forced lenders to substantially slow the pace of foreclosing…”

Often a better solution to a foreclosure, short sales are on the rise.  The article mentions, “Short sales — when lenders allow financially strapped borrowers to sell homes for less than their unpaid mortgage — accounted for 12% of home sales nationwide in the second quarter. That’s up from 10% in the same period last year, says researcher RealtyTrac.”

“Bank of America, the largest home mortgage servicer, expects to complete more than 100,000 short sales this year — more than double what it did in 2009, the bank says.”

A successfully negotiated short sale allows a homeowner to get out from under a foreclosure without catastrophic damage to their credit. In the early days, banks were mostly unwilling to deal with short sales, but have significantly improved their processes. To move bad mortgages off their books and to comply with a political push to do more to help homeowners, banks are now more willing to cooperate. Short sales are seen by many to be a compromise to a homeowner in distress (loss of job, divorce, medical bills, etc.) and a bank foreclosure.

For more information about short sales or to see if you qualify, contact Michael Michalak with RE/MAX Signature. Michael specializes in helping distressed homeowners in Chicago & the suburbs.

Michael Michalak is a real estate broker for RE/MAX signature and a blogger who helps home buyers and sellers – many of whom are landlords.  He can be found all over the internet on his twitter page and his blog.  You can also reach him via email at mikehelpschicago@gmail.com or 312-527-4417.

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2 Responses to Guest blog: short sales and Illinois landlords

  1. Aida says:

    Hello i know you give advice for lanlords but i hope you can answer this question for me. I had moved into my apartment on 11/01/10 and i had signed a 1 year lease ,the apartment below me was for rent and i decided to move downstairs so landlord had us sign new 1 year lease for down stairs on 10/1/11. Well 1 month into our new lease we found out landlord was in forclosure since 1/24/10 ,by law does the landlord have to let tenants signing leases that the building is in foreclosure? I would greatly appreciate your response. Thank You in advance.

    • Richard Magnone says:

      Your answer depends on where the property is located and what law might apply to it. There is the “Protecting Tenants at Foreclosure Act”, the State of Illinois has a law dealing with tenants going through foreclosure, and 5-12-095 of the Chicago Residential Landlord Tenant Act deals specifically with notice of foreclosure. I don’t have enough facts available to give you any legal advice here and I advise you to consult with an attorney to learn and protect your rights.