Alligator property is real estate that generates negative cash flow for the owner because the cost of ownership exceeds income. This classically occurs in the wake of real estate speculation, where an owner bought at the peak of the market and found that the property couldn’t generate enough income to support the loan. There are some steps property buyers can use to avoid purchasing alligator property. Once they have an "alligator by the tail," there are several options for dealing with the problem.
The best example of an alligator property can be seen when investors buy expensive property during a speculative bubble with a low down payment. They assume either that they can refinance or sell the property at a higher value, or that the property will generate enough income to pay for itself. Once the bubble starts to pop, it can be hard to find tenants to occupy the property, especially at rates high enough to cover the expenses.
Whether a landlord has tenants or not, the mortgage, property insurance, and taxes still need to be paid. Some maintenance is necessary to keep a building in good condition. Owners may also be liable for homeowners’ association fees and other expenses. They may end up with an alligator property when they cannot bring in enough income from rents to cover these expenses. As a result, each month they end up expending more of their savings to retain ownership of the property.
It can be difficult to avoid speculative bubbles, as one of the characteristics of such phenomena is that they may appear financially sound from the outside, until the bubble bursts. However, buyers can choose to make large down payments to increase their equity, and reduce the size of mortgage payments. This can protect them from one of the leading costs associated with an alligator property: the mortgage payments. Avoiding adjustable rate mortgages and similar financial products can also be beneficial, as it may protect the property owner from extreme market fluctuations.
Once a property has become an alligator, it may be possible to renegotiate the loan in light of the fall in property values. A lender could lower interest or forgive part of the principal to keep the home in good standing. It may also be possible to sell an alligator property to someone in a better financial position, which may at least pay off the loan and allow the owner to break even.