Rising interest rates and operational challenges have put some apartment owners in difficult positions. If your building’s debt has become unmanageable, understanding your options early can help preserve equity and protect your credit.
If you need to sell a distressed apartment building, acting quickly is essential. Understanding your options before default can help preserve equity and protect your credit.
Signs You May Need to Sell a Distressed Apartment Building
- Negative cash flow: Debt service exceeds net operating income
- Loan maturity approaching: Unable to refinance at current values/rates
- Deferred maintenance accumulating: No capital for necessary repairs
- Falling behind on payments: Mortgage, property taxes, or insurance
- Personal funds depleting: Subsidizing the property from other sources
How We Got Here
The current distress cycle stems from several factors:
Interest Rate Shock
Owners who purchased or refinanced in 2020-2022 at 3-4% rates now face refinancing at 6-7%+. This can double debt service costs overnight.
Value Declines
Higher cap rates mean lower values. Buildings that appraised at $5 million in 2021 might be worth $4 million today—creating negative equity situations.
Rent Control Constraints
LA’s RSO limits rent increases to a percentage of CPI (now capped at 4%). Income can’t grow fast enough to offset rising expenses.
Insurance and Operating Cost Increases
Property insurance premiums have doubled or tripled for many buildings. Combined with rising property taxes and maintenance costs, NOI is squeezed from multiple directions.
Options Before Default
1. Sell While You Have Equity
If you can sell for more than you owe, do it. Even if proceeds are less than you hoped, walking away with something is better than foreclosure. Time is critical—values may continue declining.
2. Loan Modification
Contact your lender before missing payments. Options may include:
- Rate reduction
- Term extension
- Temporary forbearance
- Principal deferral
Lenders often prefer modification to foreclosure, especially for borrowers who communicate proactively.
3. Refinance with New Lender
Some lenders specialize in distressed situations. Rates will be higher, but this can buy time if you believe the property will recover.
4. Bring in a Partner
A capital partner can inject equity in exchange for ownership stake. This dilutes your position but may save the investment.
5. Short Sale
If you owe more than the property is worth, negotiate with your lender to accept less than the full loan balance. This requires lender approval but avoids foreclosure.
The Short Sale Process
A short sale involves:
- Financial documentation: Proving hardship to the lender
- Listing the property: Marketing to find a buyer
- Lender negotiation: Getting approval for the sale price
- Closing: Completing the sale with lender’s consent
Short sales take longer than regular sales (3-6 months typically) because lender approval is required. However, they’re far less damaging to your credit than foreclosure.
Foreclosure: The Last Resort
If other options fail, foreclosure may be inevitable. In California:
- Non-judicial foreclosure: Most common; takes about 4 months
- Deficiency judgment: For purchase-money loans on 1-4 units, lenders typically can’t pursue deficiency. For 5+ units or refinanced loans, they may be able to.
- Credit impact: Foreclosure stays on credit for 7 years
Protecting Yourself
Consult Professionals Early
Talk to:
- A real estate attorney about your options and liability
- A CPA about tax implications of various scenarios
- An experienced broker about realistic sale values
Don’t Wait Until It’s Too Late
The earlier you act, the more options you have. Owners who address problems proactively almost always achieve better outcomes than those who wait.
Document Everything
Keep records of all lender communications, financial statements, and property expenses. This documentation is essential for loan modifications or short sales.
Tax Implications of Distressed Sales
Debt Forgiveness
If a lender forgives debt (in a short sale or foreclosure), the forgiven amount may be taxable as income. Consult a tax professional about potential exclusions.
Capital Losses
If you sell for less than your adjusted basis, you may have a capital loss that can offset other gains.
Moving Forward
Financial distress is stressful, but it’s not the end. Many successful investors have experienced setbacks and recovered. The key is making informed decisions and acting decisively.
If your LA apartment building is in financial distress, contact me for a confidential conversation. I’ll provide an honest assessment of your property’s value and help you understand your options.
Selling a distressed apartment building requires speed, discretion, and expertise. When you sell a distressed apartment building, time is critical. The sooner you explore your options, the better your outcome is likely to be.