I bought a rental property at the peak of the housing bubble just before it burst. I managed the property for 6 years. I became bitter over the loss in value. It became a huge money pit. I wasn't raking in the cash; I was just doing a bit better than breaking even until something would break. I was tired of managing it and I was ready to give it back to the bank.
I had great credit and some assets that were not a part of the rental. Sounds great, right? Why not just do a loan modification or liquidate some personal assets? Well, as with anything, sometimes you have to cut your losses. I was tired of dealing with the property. It would have taken me another 15 years to pay the mortgage down to what the property was worth today. Then who knows? Maybe the property is worth half of what it is today. The major problem is that anyone who bought property during the housing bubble can't get out of their loan. You are basically a slave to the mortgage for however many years it takes to pay it down to real property value. In a normal real estate market, you would be able to at least sell your home and break even after 2-3 years.
So here's what you need to know: The Options. You can do a loan modification if you want to keep or stay in your property. You can do a short sale which takes a lot of time and you may lose potential buyers. You also have to figure out who's paying realtor fees. You can also do nothing, just let it go to foreclosure. It's probably the worst option for your credit and ability to buy another property someday. The final option is to do a deed in lieu of foreclosure. This is what I did. I basically give up my ownership rights to the property and the banks forgives the deficiency in the note. It doesn't show up as a foreclosure and my credit isn't as severely affected. Short sale, foreclosure, and deed in lieu all carry a tax burden. The IRS treats the banks loss as your gain. The laws change every year so read up on it to understand what you'll owe the taxman.
I chose to do a Deed In Lieu. NOTE: If you do a Deed In Lieu, the bank probably won't do it if you have a second mortgage. You need a clean title. You'll probably have that problem with short sale too.
The first problem I faced is that I have to show that I can't afford to keep making payments. You have the same problem for deed in lieu, short sale, and forclosure. I probably could have afforded it, but for 15 more years? I don't think that financially strapping myself just to keep clean credit is worth it. I needed some serious debt. I keep those balance transfer letters from my credit cards just for rainy days and this was one of them. Maxing out my credit cards causes another problem though. Balance transfer fees and possibly interest, unless it was 0% for a period of time. I don't want to incur anymore debt. I need to invest the money I'm borrowing from my credit cards in order to pay them back until I'm done with the deed in lieu process.
Here's my solution for incurring debt and paying for it. I dabble in the stock market a bit and I've been investing in a mutual fund called GABUX. GABUX pays about 1.2% per month dividend. That's 14-15% annual yield. It's enough to make my minimum payments on my credit cards if I do 0% balance transfers and pay the fees. So I did 0% balance transfers on every single credit card I have for as much money as possible. I created a spreadsheet to track the amount borrowed, dividends, payments, and expiration of the balance transfers. Make a spreadsheet in order to deduct the credit card loan payments from the dividend income for tax reasons. Otherwise you will have to pay income tax on the dividends.
I invested it into GABUX through eTrade. If you want to know when to invest in GABUX, when it is cheap, learn about RSI (Relative Strength Index). Buy when RSI is close to or below 30, and sell near or over 70. Go to http://stockcharts.com/h-sc/ui and type GABUX in the box above the chart. The RSI is near the top of the chart. Notice how RSI corresponds with price. You may have to wait a few months for the market to give you a buying opportunity. Be ready when it does.
Once I had my debt in place, I stopped making payments. After a few months I made contact with my mortgage company through Fannie Mae. I had to fill out a bunch of forms and paper work to be submitted to my mortgage co. The mortgage co. accepted the Deed in Lieu. They made a property inspection date with me. They wanted the property "Broom Clean". That translates to remove every single thing that is not nailed down, except appliances and things of that nature. I failed my inspection. The mortgage co. called me and wanted me to clean it again for another inspection. There was way too much stuff for one guy to do the work and I wasn't going to spend another dime on the property. The mortgage co. offered me $1000 to get it cleaned out. I wasn't interested. I told them to hire someone. Well they we persistent and I knew I could make a few bucks off this deal so I agree...on the phone. Now, if you ever make a deal on the phone, don't expect it to happen. I hired some guys to clean it out and the mortgage co. reneged on our verbal deal. GET IT IN WRITING before you do any deal with the mortgage co.
The mortgage co. foreclosed on me without giving me my Deed in Lieu and I never got my $1000. I contacted them and they were jerks about it and claimed there was never a deal for the clean out. Don't make my mistakes. GET EVERYTHING IN WRITING. BTW... don't forget to sell GABUX before the credit card transfer deals expire. Good luck to you if you are going through property foreclosure. I hope this helps others.