What happens if you go into financial default on commercial property?
My sister and I own a commercial building–the business we ran inside went bust thanks to the lousy economy. The building has been up for sale for many months with NO bites. We’ve lowered and lowered it. No one is buying–small town.
My sis and I both work, but this is still financially hard on both of us to keep paying on this building. Mortgage lender has changed our loan to a balloon mortgage, interest only (which saves us several hundred dollars a month), but if I sign it, we have one year & then have to come up with the entire principal, and he said there is NO guarantee they will renew it.
There is NO way we can pay it off in a year. So all this makes me wonder if we should just call it quits, keep what little we have left in our savings, stop working so hard to keep up on the mortgage. Our houses are NOT the collateral–the building is.
Sure, I know we’ll lose both of our top credit standings, but…..this is the pits, and it looks like we could lose it anyway in a year if we sign the new mortgage…..
What else would we face if we stop paying? Is it possible that it’s worth it?? Any other comments for us to think about?
Ananamas, yes, I did like your questions, but wasn’t sure how to implement them. For example, how do I find the kind of businesses who don’t have to be physically present? How do I contact them? That seemed daunting. Also, I think the city council requires that buildings on our block be a retail for customer to walk into.
As far as leasing it, we had some bites, but they ALL wanted to pay FAR less than our mortgage!! Very frustrating. People are low-balling.
Networking with local banks and Chamber about new businesses coming in or expanding–not sure either is happening in this community. No, we’re not in a dead community at all. It’s just the "economy{ thing…..
I’m still very interesting in all your ideas. Just not sure how to make them work. This is maddening.
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2 comments
ananamas on August 18, 2009 at 2:58 am
Ask yourself, realistically, how much equity you have in the building. If your loan were at 50% LTV, or lower, it’s more likely that taking the risk of getting the loan is worth it, because if you could sell it someday, somehow, you’d have a good payoff. On the other hand, if your loan is already at a high LTV (like 80% LTV), considering that the credit crunch is driving down commercial property values, then in a year you may have no equity at all… in which case, letting it go seems like a more reasonable proposition.
Also, consider whether the value of the building is likely to keep increasing over the long haul. Given that it’s in a small town, my guess is probably not. Again, that would point towards *not* throwing more money into it being a reasonable decision.
Also, I didn’t get voted best answer on your earlier question about how to sell the building, but did you read my suggestions there? What do you think of them? I really had some good ideas for you.
Finally, keep in mind that there are "distress buyers" who will buy ANY real estate – for the right price. These are the types of people that put up those "I buy houses" signs. Maybe call a couple of them and see what price they’d give you for the building. Even if you just got a few bucks from them, would that be better than having to continue to make payments, plus risk foreclosure in a year and trashing your credit? Plus, if you get prices from them that are below your debt balance, it gives further evidence that maybe you should not continue to service the debt and that walking away is a reasonable decision.
Good luck, in any event.
Kelle on August 18, 2009 at 2:58 am
See a debt counsellor. ( free – yellow pages)
They will give you good advice.