Expert: Terrence Cullen - 11/10/2009

Question
QUESTION: Hello,

I am considering refinancing my office condo. I opened a business about a year ago but was forced to close it down. I own the office condo and I am looking to reduce monthly mortgage payment. My current lender has agreed to reduce the amortization term from 10 yr to a 20 yr term, thereby reducing monthly costs by about $500. I would have liked a 30 yr amort term given that I'm trying to sell and/or lease the property asap (very tough times), so there's sense in saving as much as possible. There's an existing 3% prepay penalty in place for another 2 years, so if I refinance I would be paying the penalty and would be accrued to my existing balance (an additional $3,300 or balance to the balance). I'm paying a rate of 6.79%. The new term of the commercial loan would not include a prepay clause, which is good, so the prepayment would only take place once. We're not talking big money, remaining balance is $110,000. Even though it's not big mortgage, monthly expense of $1,390 in mtg is significant, specially for a property that's not producing anything. Taxes + condo fees + insurance, adds an additional $9,000+ per year.

When I opened the business I told the lender I would run a business, however it failed. Would another lender agree to finance this office condo under the circumstances I am facing? I don't plan to do anything in this office, except sell it or lease it. But again I would prefer a 30 yr term amortization and perhaps a better rate than my current 6.79%. That's my goal. Just not sure if it's worthwhile searching for another lender.

By the way, the loan is personally guaranteed by my spouse and myself. We have EXCELLENT credit, we just want out. We are based in New Jersey.

Your advise will be appreciated!

Alex

ANSWER: Your current lender has been very accommodating concerning the economic climate. Without having a tenant you are in a tough position to refinance. What would be the market rental rate for this space? How many square feet is this condo?  What is the market sale rate for this condo? Do you have comps?
  If the market rental rate is above the mortgage payment then you might find someone to do a purchase and rent it to a related entity. What you would want is the remaining balance in cash to pay off the mortgage and you would hold a note on the rest. You would want to be in the first position if possible. I suggest you find an eager broker to find a possible purchaser, otherwise just get used to paying $1,390 in mortgage payments, because I do not think that you can find better especially without a tenant. Good Luck TC

---------- FOLLOW-UP ----------

QUESTION: Hello TC,

Thank you for replying, I have a follow-up:

Please clarify strategy described. What do you mean "find an eager broker"? I have a realtor, the same one who was selling this unit a year ago. The condo is listed for sale/lease, but times are tough. In the complex there are 3 condo spaces available, 2 of them 1,000 sq ft and one for 3,000 sq ft. There are approximately 30 units in the complex.

What about a short sale? Somebody I know suggested this route, he would be willing to pay $90 or $100K, the bank is owed $110K. How can I qualify for a short-sale, what are the requirements and contidions in the current economy?
How could I make the point to the lender after contacting them for a refinance option?

The market rental is about $12-13/sq. ft, it's a 1,000 sq ft office condo (mostly small medical offices). The market sale is roughly $150,000, that's what I paid one year ago, that's reasonable per realtor and also per condo manager. Selling for $135,000 might be easier, but after putting $20K in upgrades, I'm hesitant to just sell it with the additional loss.

That's why I thought, refinancing with current lender to reduce monthly bill by $500 is not as bad. We can afford the monthly expense, but that limits our monthly liquidity significantly.

Besides getting used to paying $1,390, is the short sales route advisable? Or perhaps just stick to a refinance lowering my payment.

Thanks again for sharing your ideas.

Alex  

Answer
You don't qualify for a short sale, but that doesn't mean you can't sell it below value. It only means that most likely your bank will not accept less than what is owed. The property has to be in foreclosure for them to accept a short sale.
What I meant by "eager broker", is someone who is hungry enough to help you fashion a deal that will get you out of your mortgage. Good Luck, TC