Author Topic: Helping a Friend in Dire Straits  (Read 3916 times)

frugalcoconut

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Helping a Friend in Dire Straits
« on: August 25, 2016, 06:16:13 PM »
A really close friend is an older woman who retired in her late 40s after running several successful businesses, and she is now in her early 60s.  She lives off of some significant real estate investments -- primarily rental income from a small handful of commercial properties (and a couple of residential properties mixed in).  She leads a somewhat lavish lifestyle although she has scaled back quite a bit recently at my direction.  Starting with her divorce a couple of years ago, it seems like there has been a steady stream of financially unfavorable events ... most notably a legal dispute involving my friend, one particular commercial tenant, and the owner of that entire shopping plaza.  A resolution has been agreed to by all parties but the biggest challenge is that the tenant is withholding rent until an "overpayment" has been satisfied (deducting each month's rent until a zero balance has been reached).  This property is by far the largest investment in her real estate porfolio and represents the majority of her monthly cash flow -- without it, she has been gradually sinking further into debt and is now basically living off of credit cards.  It is coming to a head because her credit cards are close to becoming maxed out.  All of her assets are extremely illiquid.  She has equity in all of her properties but she was just denied a refi on her primary home due to not showing enough income (and I assume the increasing debt load isn't helping matters either). 

This situation is expected to continue for approximately one more year (mid-2017) when the payments should theoretically resume from that tenant. 

She is extremely depressed, possibly borderline suicidal ... but she is too proud to tell anyone else what's going on and at this point she feels too hopeless to do much of anything at all. 

Can anyone help with ideas as to how she can get through this? 

She literally only has enough money to pay her bills for 1-2 more months ... maybe stretch to 3 months if we're lucky.

Ideally she could get a cash-out refi but she probably needs $200K+ to pay off all the credit cards and have enough money to live on for the next year ... but I'm not sure if we should go to a bunch of different mortgage companies to see if one agrees to underwrite (and take the chance given the temporary circumstances) ... and also I'm not sure if it's easier to do that on the commercial side or the residential side. 

Is there any lender who might be willing to do a bridge loan or even a hard money loan for that high of an amount?

LeRainDrop

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Re: Helping a Friend in Dire Straits
« Reply #1 on: August 25, 2016, 08:08:38 PM »
She is extremely depressed, possibly borderline suicidal ... but she is too proud to tell anyone else what's going on and at this point she feels too hopeless to do much of anything at all. 

Can anyone help with ideas as to how she can get through this? 

I think you know this in your heart, but with these symptoms and the understandably overwhelming-ness of this upcoming financial wall, your friend needs to see a therapist.  On the money side, are there any significant assets that she can flat out sell ASAP?

hoping2retire35

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Re: Helping a Friend in Dire Straits
« Reply #2 on: August 25, 2016, 08:24:09 PM »
need more info.

I was under the impression that you did not need a dime of income to get a refi. What about reverse mortgage? I would keep trying other banks, credit unions, look up government programs(not sure of any off the top of my head).

The only thing I can think of is to rent out her house, use proceeds to keep debt collectors away if it is a matter of possible bankruptcy.
in the meantime churn credit cards to keep 0% interest on all debts.

marty998

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Re: Helping a Friend in Dire Straits
« Reply #3 on: August 26, 2016, 04:55:05 AM »
A partial sale of the property to family?

frugalcoconut

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Re: Helping a Friend in Dire Straits
« Reply #4 on: August 26, 2016, 05:32:26 AM »
I think you know this in your heart, but with these symptoms and the understandably overwhelming-ness of this upcoming financial wall, your friend needs to see a therapist.

I agree, it's just hard to convince her in general and then adding that expense on top of everything else ... plus I work a full-time job so I have limited time available to do the necessary research to find one on her behalf (whereas she has all the time in the world but doesn't want to put forth the effort).

On the money side, are there any significant assets that she can flat out sell ASAP?

Mainly just the properties which take a fair amount of time and expense ... obviously less time if she did a fire sale.  Even though she has some equity in her properties, I don't think that a quick sale of any of the residential rentals (SFHs) would yield enough on their own to sustain her for long enough ... with the reduced selling price for fast sale ("owner motivated! bring all offers!") along with commissions, closing costs, etc.  I have one property in mind for possible sale (since it's the least nicest and has a slightly problematic tenant anyway) on which I just received comps from her real estate agent but after mortgage payoff and commissions/closing costs, it would only provide partial relief (definitely not for a full year) and might only be worth it to flat out sell if there aren't any other decent options. 

In a way, I hate the thought of permanently disposing of these assets just to cover a temporary shortfall ... that's why I was hoping to pull out some equity rather than sell.  Either way though, there's no harm in putting it on the market, right?  Even though there's a tenant in there?

frugalcoconut

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Re: Helping a Friend in Dire Straits
« Reply #5 on: August 26, 2016, 06:10:41 AM »
I was under the impression that you did not need a dime of income to get a refi.

It might be easier on a standard streamlined refi with the same lender (who already has the existing risk on their books) ... but a different lender would be taking on a new risk and therefore would need to underwrite just like any other mortgage application ... although a cash-out refi amplifies their risk significantly.  The perception is that someone wanting to pull out cash in order to satisfy other debt obligations has a higher probability of spiraling further into debt down the road (no change in habits) and then being unable to make their mortgage payments.  Even though the house is used as collateral, banks are in the business of collecting their money ... not holding real estate.

What about reverse mortgage?

I believe that a reverse mortgage is only available if your home is paid off (no mortgage).  All of her properties have a mortgage (including her personal residence).

I would keep trying other banks, credit unions, look up government programs(not sure of any off the top of my head).

I just wish I knew of a specific company that would be more flexible and cater to this kind of borrower ... but yeah I'll probably have to help her start a bunch of different cash-out refi applications in hopes of hitting a single home run.

The only thing I can think of is to rent out her house, use proceeds to keep debt collectors away if it is a matter of possible bankruptcy.

She has a ton of stuff.  Moving wouldn't be cheap by any means ... not to mention the cost of additional storage.  I'm not sure that the cost differential would make it worthwhile to rent out her current house versus whatever she would pay to live somewhere else.  Plus there's lots of landscaping, etc. and it could be challenging to find a renter for that type of niche market at the proper price point.  (I expect that most people who want style of property would just straight-up buy rather than rent, because otherwise they couldn't afford the upkeep.)

in the meantime churn credit cards to keep 0% interest on all debts.

I have been considering this as an option but I'm afraid that any new CC applications might trigger her current credit cards to freak out and cut off any remaining available credit.  Does anyone know if this could happen?

frugalcoconut

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Re: Helping a Friend in Dire Straits
« Reply #6 on: August 26, 2016, 06:18:01 AM »
A partial sale of the property to family?

I'm really curious about this ... could you please explain further?

For example, there is one residential rental property (SFH) of hers that I personally love ... but I wouldn't want to pay anywhere near the current market price for it.  I was reading on BiggerPockets where sometimes, after doing an initial purchase for cash, the buyer will have trouble refi-ing down the road ... and the original buyer then brings in a partner who I think gets added to the title and the refi is done solely in the partner's name.  I'm not totally clear on how it works or how to translate that over to this situation ... because obviously I want to ensure that my interests are protected too if I entered into some kind of arrangement with her on this particular property.

ooeei

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Re: Helping a Friend in Dire Straits
« Reply #7 on: August 26, 2016, 07:38:16 AM »
It's clear you care a lot about this person, and really want to help them out.  I have to say, from an outsider's perspective, this person needs to do some work to help themselves.  Having as many rental properties as you are implying, and being completely financially destroyed by one of them not paying rent for awhile just sounds a bit crazy to me.  Your friend needs to cut expenses bigtime and suck it up for a year. 

I get that you want to help her out, but the reason there are so many warnings about being overleveraged and isolated to one investment are because these situations are not good.  It makes me think of someone who's making big $ on an oil rig and blowing it all on trucks and fishing equipment who gets let go, then finds out they have cancer and let their health insurance lapse because they couldn't afford it.  Do I feel bad for them, sure, but they should've saved money during the good times to prevent this from ever becoming an issue.  I certainly wouldn't be thinking about cosigning for loans for them or being business partners in any way.

This situation sucks, so she's going to have to do some things that suck for awhile.  Take in a roommate, sell some stuff, sell a house, get a job, etc etc.  If there's no change in situation expected for a year, putting a property up for sale seems reasonable.  Even if it takes 3 months to sell and 3 months to get paid, she's still got 6 months left in this situation where she can use the money.  If she keeps going how she is, I assume she's going to not be able to pay the mortgage on a few of these places, and will lose them anyway.

Choices

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Re: Helping a Friend in Dire Straits
« Reply #8 on: August 28, 2016, 09:05:59 PM »
It's clear you care a lot about this person, and really want to help them out.  I have to say, from an outsider's perspective, this person needs to do some work to help themselves.  Having as many rental properties as you are implying, and being completely financially destroyed by one of them not paying rent for awhile just sounds a bit crazy to me.  Your friend needs to cut expenses bigtime and suck it up for a year. 

I get that you want to help her out, but the reason there are so many warnings about being overleveraged and isolated to one investment are because these situations are not good.  It makes me think of someone who's making big $ on an oil rig and blowing it all on trucks and fishing equipment who gets let go, then finds out they have cancer and let their health insurance lapse because they couldn't afford it.  Do I feel bad for them, sure, but they should've saved money during the good times to prevent this from ever becoming an issue.  I certainly wouldn't be thinking about cosigning for loans for them or being business partners in any way.

This situation sucks, so she's going to have to do some things that suck for awhile.  Take in a roommate, sell some stuff, sell a house, get a job, etc etc.  If there's no change in situation expected for a year, putting a property up for sale seems reasonable.  Even if it takes 3 months to sell and 3 months to get paid, she's still got 6 months left in this situation where she can use the money.  If she keeps going how she is, I assume she's going to not be able to pay the mortgage on a few of these places, and will lose them anyway.
+1 to this.

Therapy will likely be helpful, as will simplifying her rental portfolio to fewer properties that are paid off. She should consider getting a job and drastically cutting expenses. Even if this crisis blows over, she still has 30+ potential years left and needs a more solid plan.

No, you can't force her to do any of these things, but if she gets desperate enough she will. Is anyone enabling her right now to keep her from feeling the pinch? Even if they have hearts of gold, they're likely doing more harm than good in the long run.

Cpa Cat

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Re: Helping a Friend in Dire Straits
« Reply #9 on: August 28, 2016, 09:50:22 PM »
If things are as bad as you say, then there's not really a good or easy solution.

She's up against the wall and needs to act quickly - but doesn't want to because all avenues are unpleasant.

$200,000 to pay off credit cards and stay current with expenses? That's staggering. What is the bare minimum to do minimum payments on the CC's and stay current with expenses? If she were able to sell a property with equity, would it actually cover that nut?

She has a lot of stuff? Great - she needs to sell most of it. She has a house? Great - get some roommates. There should be space once she sells her stuff. She has equity somewhere? Great - she needs to contact a realtor and get that property on the market ASAP. Partial relief is something. She doesn't need to do just one of those things, she needs to do all of them.

The harsh reality is that if she doesn't make some hard choices, she's going to default on her credit cards. She may default on her credit cards anyway, but it's better than defaulting on a mortgage.

According to you, her troubles started a couple of years ago - not all at once, but with one successive event after another. And yet she didn't take any moves to increase her liquidity over those years. And she still doesn't want to. What happens if you manage to float her until mid-2017 and there's another dispute with this or another tenant? She could have been selling properties to prepare for that, but instead you're looking at high-interest loans to get her through the year. She still has assets right now. She might not in a year, if things don't go smoothly.

frugaldrummer

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Re: Helping a Friend in Dire Straits
« Reply #10 on: August 29, 2016, 12:41:20 PM »
Quote
Starting with her divorce a couple of years ago, it seems like there has been a steady stream of financially unfavorable events

This may be a key factor in her current financial situation, if depression over the divorce caused her to stick her head in the sand about her worsening financial situation.  Also, does she have any signs of early Alzheimer's or alcoholism or drug abuse?  For a savvy businesswoman who was able to retire so early, her lack of financial acumen seems worrisome, perhaps something is affecting her judgment?

Quote
She leads a somewhat lavish lifestyle although she has scaled back quite a bit recently at my direction.
Quote
She lives off of some significant real estate investments -- primarily rental income from a small handful of commercial properties (and a couple of residential properties mixed in).


If she has truly reined in her lifestyle but still can't live off of her other investments, these are not good investments most likely. And borrowing more money to subsidize her lifestyle and bad investments for the next year would NOT be a good idea. 

Sounds to me like she really really needs to evaluate each of her properties.  Since you say none of them has enough equity to bail her out here, it seems likely that some of these properties are actually bringing in very little positive cash flow, or may even be negative cash flow. She needs to sell these properties in order to pay off those credit cards (think of the interest payments!  Yikes!) .  She needs to be on a strict budget.  And she definitely needs to consider taking in a room mate.  And/or getting a job for a while.

She should only keep properties that are generating a CLEAR good positive cash flow (after accounting for things like repairs and vacancies).  It sounds like she was over-extended on her real estate investments if she has that many properties but doesn't have enough equity to sell off one or two properties and cover her debts. She's been hiding her head in the sand. 

She CAN right this ship, as she does have considerable assets, but it's going to take more than a temporary solution - the fact that she's in this pickle is NOT due to just bad luck, but to poor planning and budgeting as well. 

Also - if she has a more lavish home than she needs, and has good equity in the home, she might consider selling and downsizing to a less expensive home at some point in the future.







crispy

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Re: Helping a Friend in Dire Straits
« Reply #11 on: August 29, 2016, 02:36:41 PM »
Could she sell her personal residence and move into the house with the problem tenant (I think that is one way to legally get rid of a trouble tenant although I am not 100% sure)? She could also liquidate a lot of the stuff she has which would make even more money. Just throwing out a idea. 

hoping2retire35

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Re: Helping a Friend in Dire Straits
« Reply #12 on: August 30, 2016, 06:41:28 AM »
I am just trying to imagine what her place looks like based on your description, and have a feeling she lives (somewhat) extravagantly.

large spread, gardens, yards, pool house, large house filled with antiques and family heirlooms. Considering her expenses that you are mentioning, and how much work you said was involved I am guessing she has a gardener and sometype of house keeper. Am I getting close? If any of what I have said is remotely true, she needs to immeditely start selling stuff. sell the antiques, keep some small family heirlooms(she wont want to sell them anyways, just tell her she can keep a few small, less valueable ones) then sell the house. Could leave larger furniture pieces with it.