Bankruptcy and the Real Estate Investor – BK Doesn’t Solve Everything

Posted on: June 5, 2010

Categories: Investors, Procedures, Things To Consider

Author: buyfixandprofit

Flippers and Rehabbers Caught in the Crash

Many real estate investors, flippers, and rehabbers were caught with their pants down when the real estate market crashed in mid 2007.  Rehabbing and flipping foreclosures was the craze at the time, as depicted on the many popular TV shows such as Flip This House and Property Ladder.  As long as the money was flowing loosely from the banks to the investors and homeowners, flipping a rehabbed home was relatively easy.  Almost anyone could arrange 100% financing for their end-buyers back then.

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Bankruptcy & Real Estate Investors

But when the money dried up and banks stopped lending almost over night, many investors were left holding fully rehabbed homes with no buyers to be found.  Many of the flippers at that time had no intention of ever being a landlord and therefore were determined to sell their property rather than rent it out.  The problem is that the real estate markets only got worse.  For several different reasons, the REO’s being flipped for quick cash were not good rental property candidates.  They were either too expensive or in too rough of a neighborhood to find quality tenants to occupy them.

Bankruptcy – What Does it Accomplish for the Real Estate Investor?

Many investors spent their entire savings and even their retirement savings (ouch) in an effort to keep their under performing rentals afloat when selling them didn’t work.  Stuck with maxed out credit cards and uncooperative lenders, many investor have filed for bankruptcy to get out of this mess.

Bankruptcy Accomplishes the Following for a Real Estate Investor:

  1. It eliminates the right of the lender to collect a deficiency judgment from the investor when the property sells for less than its loan amount.
  2. It relieves the investor from the obligation to repay the note on the property.
  3. It eliminates the need to pay the real estate taxes, since the bank cannot come after the investor anymore.  The bank will be stuck paying the taxes for you, in order to avoid the property being sold at a tax sale.

Bankruptcy Does Not Accomplish the Following for a Real estate Investor.

  1. Bankruptcy itself does not relinquish ownership of the property. The real estate investor still legally owns the investment property after a bankruptcy is filed.  The bank has to legally foreclosure on the investor in order to take back the property.  This means the investor could keep collecting any rents received until the property is sold at auction assuming the bank does not assume the rents as they are entitled to.
  2. Bankruptcy does not eliminate the landlord’s liability for what happens at the property.  Since ownership still belongs to the investor, the investor can still be sued by a tenant, the city, or issued violations that will have to be dealt with.
  3. Bankruptcy does not eliminate the landlord’s responsibility to the tenant as dictated by a lease or local tenant-landlord laws.

Your Real Estate Investing Career is Not Over

Remember, bankruptcy stays on your credit report for 7 – 10 years so make sure its your only way out.  But if that’s your last resort, don’t be pressured into doing anything that’s not required of you.  Being eligible to file for bankruptcy usually means you’re in pretty bad shape financially, so understand the law and do what’s necessary to get yourself back on your feet as fast as possible and investing once again.

Bankruptcy does not mean your real estate investing career is over.  There are still many options out there for the creative investors.  Private lenders, hard money, transactional funding, and owner financing can all be used to continue investing in real estate even with bad credit.

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