A Michigan housing investor says she's sinking, but there's hope on the horizon, if she can hold out long enough.

Writes one Michigan Investor, "I would like your opinion on what to do with investment properties (we own 9) that are slowly sinking our ship. The real estate market is glutted with way too many properties in our area (Michigan is 6th in foreclosures) and so selling is not a great option. We don’t have the time or the money to put into these homes like we thought we would when we bought them. What’s the best thing to do in this situation?"

Realty Times responds:

In all things timing. You have nine properties, and some possible options. Unfortunately, housing prices are being impacted by the rising foreclosures and late-payments in your state, which are making lenders more cautious.

In the third quarter, Detroit posted the highest foreclosure rate in the nation -- one foreclosure for every 80 homes, 4.5 times the national average, and a rise of nearly 42 percent over Q3, 2005.

Says award-winning Washington, D.C. columnist Ken Harney, "In economically hard-hit areas, such as the industrial upper Midwest, late payments were far more commonplace. In Michigan, for example, 21.5 percent of all subprime homeowners with adjustable-rate loans were delinquent, and one of every 10 were in the process of foreclosure. In Indiana and Ohio, 17.5 percent of subprime ARM borrowers were late, and more than 10 percent of them in foreclosure."

Substantial job loss has made parts of Michigan risky for homebuyers, and although many communities are working hard to change their economies from tool and die and auto parts manufacturing, it may not be happening fast enough in your area to help you through the hump. Only you know if you can hang on or not.

"You are in a tough position, for sure," says Rochester Hills, Michigan foreclosure specialist and Realtor Pat Parrott. "I know by federal government figures that Michigan is #50 in home appreciation by state and at least from a couple years ago, the 3rd highest move-out state in the nation. What this does is put a glut of homes on the market so home prices goes down. In addition, rental rates go down because there are less people to rent homes to, due to the declining population."

Parrott recommends four options to consider.

1. Sell to your tenants. Determine if you can set a price that is to your advantage and theirs. Determine what rent they are paying and see if you can sell at price that will not increase their net out of pocket each year. They will have to pay taxes and insurance but will get a tax break on mortgage interest deduction, so factor that all in. If it makes sense for them, and if you can find them a lender who can qualify them, then draw up a contract, possibly a lease option contract, and have them sign. If their lender says she can qualify them in 6 months, set a lease option contract for 6 months.

2. Determine the real value of your homes (comps don’t always tell in a receding market -- find out what an investor might pay for them), then see if you can sell them in a block to one or two investors, and just get out. That’s the cut your losses approach. You’ll have to do the math to see how much you might lose in the next 1-2 years keeping them and factor that into how low your sales price can be.

3. Though not the best option, see if you can turn the deed back over to the bank (deed in lieu of foreclosure) on the homes providing you the worst negative cash flow. If you are not behind on your payments, the banks usually won’t discuss anything with you. But if you miss 2-3 payments, you will have their ears. You may be able to negotiate to turn the deeds back over to them explaining you are going broke (if you are). However, choosing this option will hurt your credit rating (due to late payments) and may affect any refinancing you do on other properties you own saddling you with higher interest rates. If the mortgages went into full foreclosure, the foreclosure blemish would be on your record for 7 years.

4. The last option would be bankruptcy. Without seeing your financials, I can’t say if this is even an option to consider unless your net worth is approaching zero. You would definitely want to speak to a good real estate attorney on items 3 and 4 or any items requiring contracts.

While Parrott's response centers on disposing of the properties, there's also a case to be made for hanging in there.

According to commercial broker Joe Banyai at Signature and Associates, the county where he does business isn't taking job loss lying down. They're pursuing emerging trends industries and tempting them to locate in Troy, Madison Heights, Auburn Hills and Oakland with favorable commercial rents.

"Oakland County is taking a proactive approach and calling on these top emerging trend industries and top 100 companies so there are 1000 companies being pursued," explains Banyai. "We send people all over the country and the world. If we close an American facility, it will open up with a foreign manufacture, because they don't have to deal with legacy costs and problems with employees than no longer work economically."

Banyai explains that consequently, commercial real estate is up in the area. "The only problem we're having is lenders are critical of Michigan," says Banyai, "so our cap rate is higher on the rate of return on a building than anywhere else in the country. It is designed to induce buyers to come to our area, as it eliminates some of their risk. You get a higher rate of return. We're selling a lot of property, property that's already leased out."

Banking on the nontraditional commercial lessee doesn't come cheaply for property owners.

"It's just a function of price, you can't get what you could in 2000 but that's the reality," he says.

But Oakland County is getting new companies to gamble that the Michigan economy has hit bottom and is on its way up. "I just leased a property to a German manufacturer that moved into a 155,000 square feet facility. The lease rate went from $950 per square foot to $550 a square foot, but that's what manufacturers need -- the type of overhead it takes to support successful manufacturing.

Although lease prices are cheaper, facilities are being rented and that means the economy is on the upswing which will hopefully impact the housing market soon.

"It's real hopeful," says Banyai. "We are seeing all kinds of nontraditional companies -- like homeland security, researchers, and other emerging trend industries. We are retaining our workforce, and 22 percent have college degrees, so you have everybody you need to go forward in manufacturing. We just aren't making car parts anymore."

Kathy, if you look around, homes aren't selling as well as they did last year in most parts of the country, without the substantial job loss that Michigan areas have experienced.

Only you know how dire your situation is, but the first thing we recommend is that you work with a Realtor, preferably one who is knowledgeable about both renting and selling homes who may be an excellent source of investor buyers or renters for you.

The other solution is to simply hang on and let those companies that are leasing facilities at half the cost of 2000 bring jobs to the area, and jobs will keep your sinking ship afloat. A good Realtor is also plugged into relocation -- they'll know which companies are bringing jobs to the area and can market your homes directly to the Human Resources departments that are in charge of those transfers and new hires.

Published: December 21, 2006

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