By KeyCrew Media
For most smaller New York landlords, a failed property doesn’t end when the building is sold or surrendered. It follows them for decades through deficiency judgments that can attach to every asset they own.
The conventional image of a landlord walking away from an underwater property, handing over the keys, absorbing the loss, and moving on, applies to a narrow category of owners: those who structured their loans through LLCs without personal guarantees. According to Alexander Paykin, a New York real estate and commercial attorney and founder of Paykin Law, that category excludes the majority of smaller landlords in New York, most of whom signed personal guarantees without fully understanding what those guarantees mean when a property fails.
The Guarantee Most Landlords Signed Without Understanding
Paykin argues that the personal guarantee is the single most consequential variable in any distressed property scenario, more important, in many cases, than the property’s current value or the size of the loan. The guarantee converts what would otherwise be a contained business loss into a personal financial liability that can be pursued across all of the owner’s assets for up to 20 years.
The mechanics are straightforward but severe. If a lender forecloses on a property worth $2.5 million against a $4 million loan, the bank can seek a deficiency judgment for the $1.5 million shortfall, and then pursue that judgment against the owner’s other assets. “If the bank forecloses and gets two and a half million out of their four, they can then ask the court for a judgment against you for one and a half million, and then pursue it against all your other assets for the next 20 years,” Paykin says.
For an owner with other real estate, savings, or business interests, that judgment is not a theoretical risk. It functions as an active lien on their financial life.
Why Smaller Landlords Are Most Exposed
This risk is concentrated among smaller landlords, owners of two- to ten-unit buildings, mixed-use properties, and small multifamily assets who took out loans in their personal names or signed guarantees on LLC loans without negotiating carve-outs. Larger institutional owners typically have the legal sophistication and negotiating leverage to structure loans without recourse. Smaller owners generally don’t.
“A lot, if not most, of the smaller landlords do take out loans with personal guarantees,” Paykin says.
This creates an asymmetry in the distressed property market. When a large fund walks away from an underwater asset, the loss stays within the entity. When a small landlord does the same, the loss can follow them personally for two decades. Smaller landlords have far less flexibility in how they respond to financial distress, and far more to lose if they choose wrong.
The problem is compounded by timing. Many of these owners didn’t understand the guarantee’s implications when they signed it. They were focused on closing the loan, not on modeling what would happen if the property failed. By the time the property is underwater and options are narrowing, the guarantee is already in place.
The Negotiated Exit as the Only Rational Path
Given deficiency judgment exposure, Paykin argues that any landlord with a personal guarantee should treat negotiated exit options, loan modification, short sale, deed in lieu, as urgent priorities rather than last resorts. Allowing a property to proceed to foreclosure without negotiating risks the full weight of a deficiency judgment against personal assets.
“Not negotiating a short sale or a loan modification or a deed in lieu risks, in foreclosure, the possibility of a deficiency judgment and owing more,” Paykin says. “So always try to negotiate out.”
A deed in lieu of foreclosure, where the owner transfers the property directly to the lender in exchange for release of the debt, is only available when the lender agrees to it, and only provides full protection when the guarantee is also released as part of the negotiation. A short sale, where the bank accepts less than what’s owed and allows the owner to sell on the open market, can similarly extinguish the deficiency if negotiated correctly. But neither outcome is automatic. Both require active negotiation, and both require the owner to engage before the situation deteriorates to the point where the lender has no incentive to cooperate.
Paykin describes the decision framework in financial terms. If a landlord is losing $2,000 per month and hoping the market recovers in two or three years, the calculation is cumulative burn plus legal fees against the likelihood the market improves enough to break even. “How much does the market have to improve by in this time for you to break even? Is it a realistic idea?” Paykin says.
For owners who can still cover debt service and maintain reserves, holding makes sense, particularly in a market saturated with sellers. Paykin advises against selling into a buyer’s market when the loan isn’t maturing and the building can sustain itself. But once the monthly burn becomes unsustainable or a balloon payment is approaching, the math shifts decisively toward exit.
“You stop feeding the building when the cumulative burn exceeds what a negotiated exit would cost today,” Paykin says.
What the Exit Actually Looks Like
The structure of a negotiated exit depends on leverage, specifically, whether the owner has assets the lender could pursue. Paykin describes cases where an LLC with no personal guarantee and no other assets can negotiate a deed in lieu relatively quickly. The owner presents the lender with a simple calculation: spend two years foreclosing and paying attorneys, or accept the deed now.
When a personal guarantee exists, the negotiation is more complex. The owner must demonstrate that the property cannot generate sufficient revenue to service the debt, that a deficiency judgment would yield little beyond legal costs, and that a negotiated resolution protects both parties. Loan modifications that extend terms or reduce payments can preserve ownership if the net income supports some version of continued debt service, even if profitability disappears for several years.
For smaller landlords currently operating underwater properties without understanding their guarantee exposure, the gap between their perceived risk and their actual risk may be substantial. The owners most likely to face deficiency judgments are those who delay engagement with their lenders until foreclosure proceedings have already begun.
Alexander Paykin, Esq., is a New York real estate and commercial attorney and founder of Paykin Law. The firm handles real estate transactions, litigation, foreclosure, and landlord-tenant matters across the New York metro area.
Disclaimer: This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
