Victor’s Insider Scoop on What Can You Do When You Can’t Pay the Mortgage on Your Apartment?
January 16th, 2013 | top of page

You’ve tried and tried, but no matter what you do, the rental income coming in the door just isn’t enough to pay for both the expenses and the mortgage on your multi-family property. You’ve already played the game of “Robbing Peter to Pay Paul”, delayed as many vendors as you can, and cut back on needed maintenance just to keep your tenants happy.

So what are your options now?


First: Mindset
The first thing you need to do is take a deep breath, relax and really think about what you’d like to have happen.

If you could write your own script,
what would it look like, and
how would your predicament play out?

Would you still own this apartment or would you move on and just be rid of it? Would you remain as the sole owner, managing member, general partner or whatever you now are or would you give up these responsibilities?

Getting your mindset straight is the first and foremost thing you need to do in this situation because if you don’t know where you want to go, you can never get there.


Next: Assess The Facts
What are the particulars of your situation?

What are the terms of your note? Is it personally guaranteed?

If you’re not a personal guarantor, have you done anything to violate any so called Bad Boy Clauses that would make you personally liable on the note?

Is there any equity in your property based on a true and accurate fair market value of your apartment today vs. how much you owe on it?

What is the true financial performance of your multi-family property as it sits today?

Would money to invest in capital improvements today really turn the property around and help it regain financial footing, or are the economics of your apartment so bad today that even a capital infusion for improvements won’t change its true economics?

Could your apartment operate profitably if there was a change in management, marketing, or the maintenance procedures and practices in place today?

When considering these facts, it’s critically important that you be 100% honest with your assessment. For example, don’t say that if someone came up with some money for renovations and deferred maintenance then all your problems would be solved if in fact money would just serve as a short-term band aid solution.

Assessing your facts accurately is a critical step in this process.


OK, Now What?
So now you’ve honestly assessed the facts of your predicament and you know what needs to be done. It’s time to develop a plan to achieve what you want to happen.

First, I’ll start off by saying that I’m not an attorney and I’m not giving legal advice here. For anything I talk about in this report, I must counsel you to run it by your attorney and get his opinion about interpreting your specific legal documents and what the ramifications are to any courses of action you take.

The purpose of this report is to suggest various options that might be available to you and to share with you how others who have faced similar situations have remedied their situation.

When all is said and done there are a limited number of actions available when you’re in this situation. I’ve listed six courses of action below; then, I’ll discuss each option.

Your 6 Courses of Action

  1. Walk Away
  2. Sell Your Apartment                 
  3. File Bankruptcy
  4. Improve Operations
  5. Loan Modification
  6. Find a Joint Venture Partner

Walk Away
Let’s say you’ve come to the conclusion that life would be easier if you no longer owned this apartment. The stresses, strains and time commitment of its daily operations are affecting you and your family and it’s keeping you from other economic opportunities where you can improve your personal financial situation.

It’s at this point, if you haven’t already done so, that you should gather all your loan documents and bank correspondence together and sit down and have an in-depth discussion with your attorney.

Are you personally liable if you walk away from your apartment?

If you are personally liable, what are the ramifications if you give your lender the keys?

Can you sustain the personal liability hit or will you have to file a personal bankruptcy?

Will a tax liability be created if you walk away? You’ll need your CPA to give you an accurate reading on this.

If you file a personal bankruptcy, what affect will it really have on you? Many successful people have filed personal bankruptcy, have lived to tell about it, and have had many successes after filing.

What liability, if any, will you have to investors and/or partners that are in the deal with you?

Remember, I’m not saying bankruptcy is the way to go. I am saying it’s an option worth exploring when you’re deciding what you want to do. Don’t let false pride or fear stand in the way of exploring this option.


Sell Your Apartment
Let’s say you want to get out of the property but you feel either a sale or a short sale is the way to go.

To explore this strategy you have to sit down with real estate brokers who are active in and know the apartment market and discuss these options with them. Find out what your property is really worth in today’s market in comparison to what you owe.

I strongly suggest you don’t just take the opinion of one broker; talk to several. You want to make sure a broker is not just trying to “buy a listing” by quoting a high price only to find out later that there is no way he can ever achieve that price. Have them show you facts and figures and justify why they feel they can obtain the price they tell you.

Armed with this information, you can more accurately determine whether or not a sale is a route you should explore further.


File Bankruptcy
Bankruptcy is a word that many people are afraid of. Yet, many businesses use bankruptcy as a strategic tool to straighten out past business problems and gain a fresh start.

Bankruptcy does not necessarily mean liquidation. Many people equate bankruptcy to throwing in the towel and your apartment is sold to the highest bidder. This is what happens in a Chapter 7 Bankruptcy.

A Chapter 11 Bankruptcy is quite different. In a Chapter 11 Bankruptcy, you propose a plan whereby, if given certain concessions by lenders and creditors, you can work yourself out of your predicament and emerge from your current problems.

The intricacies of filing bankruptcy are beyond the scope of this report. In order to understand exactly what you’re getting into by filing bankruptcy, you need to engage an attorney experienced in real estate bankruptcy and discuss your particular situation. You also need to make sure you discuss your loan documents in detail with your bankruptcy attorney because sometimes even the act of filing bankruptcy nullifies your waiver of a personal guarantee on the loan and can make you personally liable for the loan even if you didn’t have an overt personal guarantee in place. This language is particularly prevalent in CMBS loans so it’s something to be aware of and discuss with your attorney.


Improve Operations
Let’s say you look at your situation and recognize that your cash flow problem can be solved through proper management of your apartment.

If this is the case then you need to interview multi-family property management companies in your area that are successful in managing your size and class of apartment. Take special note of the emphasis here as not all property management companies are adept at managing all sizes and classes of apartments. Ask them what they would do differently from what is currently being done. Have them show you demonstrated successes in what they are saying that they can do in your market with your size and class of apartment.

Also make sure you understand what cash infusion, if any, will be needed from you to implement their plan.


Loan Modification
Let’s say you feel that if you got some short-term concessions, you could turn things around and stabilize your apartment.

If you feel this is the case, then the first thing you need to do is put together a plan detailing what type of concessions you feel you need and what you could do if you had these concessions.

If you truly want a loan modification, you have to understand that you need a good, solid, supportable plan that is believable, can be achieved and is easy for your lender to understand. The better you make this package for the lender, the easier it will be for the lender’s asset manager to “sell it up the chain” to the decision makers.

In order to travel this road it’s best to engage an expert in working with loan modifications for commercial real estate loans. This is a “cottage industry” and usually not something that is well handled by a generalist attorney with not much experience in this area.

Whoever you engage to help you in this negotiation process with your lender, make sure you check their credentials. Understand who they have helped, what their success rate has been, and above all, do your due diligence and check their references. See if they have negotiated successfully with your particular lender in the past.

Sometimes a loan modification will be contingent upon the investment of new capital from a JV partner or yourself. This is an outcome you have to be prepared for in any loan modification discussion.


Take On A Joint Venture Partner
If you truly believe in your project and that the investment of additional capital will turn your property around and allow it to cash flow and ride up the increase in value that will occur as the market continues to correct itself, don’t dismiss this option as out of hand.

There’s a lot of investment money sitting on the sidelines looking for good deals. If you have a good deal but you just need some additional capital to bring it to fruition, this is a viable option.

Joint Venture Partners come in all shapes and sizes. Some require control. Some will take a passive role if you can demonstrate that you have a viable plan in place and have the capability to carry it out. Everything is negotiable.

But again, as with the option of a loan modification, you must have a well thought out plan in place that’s credible, well documented, and above all, achievable.

PRAEDIUM Advisors has a list of prospective JV partners who are actively looking for good deals. In fact, we put a joint venture together in 2012 by making just one call because we knew exactly who to call. We can do the same for you!
In summary, if you can’t pay your mortgage, you have options available to you. The most important thing you can do is to be proactive and decide what you want to happen. Don’t let other people decide for you.

If you need help taking that first step to gather your thoughts or ideas as to what options you have, we at Praedium Advisors are experienced in helping you assess your situation and can help you put together the plan and action steps needed to carry out your plan.

For a FREE, no obligation consultation regarding what you can do when you can no longer pay your mortgage contact Victor Allison at 602 320.6200 or at You’ll be glad you did!

Dedicated To Multiplying Your Income

PS – If you are ready to begin to thrive again by getting off the sidelines and putting your money to work give me a call at 602-320-6200. I see lots of deals and may have just what you are looking for.

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