Tenant Rights in a Short Sale or Foreclosure property

Michael G. Kornitzer
Sniper Real Estate
July 26, 2010

Overview

Almost daily we are hearing about Tenant issues relating to Short Sale and Foreclosure of the property they have rented. There are two common situations for the property owner (Landlord) that directly affect the Tenant.

1) An honest Landlord just can not make ends meet on the rental property. Landlord reviews his options and realizes that he probably can not keep the property. He must do a modification (unlikely), sell the property or give it back to the bank Short Sale/Deed in Lieu. Otherwise the property will likely end up in foreclosure. In this scenario the Landlord should discuss the situation with the Tenant. Review possible exit time frames and reduce rent if it is not used to pay the mortgage.

2) A dishonest Landlord continues to collect rents without paying the mortgage. He knows that the mortgage is in default or Foreclosure, often does not discuss the situation with Tenant. In most states this is technically not illegal. The Landlord "owns the property" and can use it at his discretion until he no longer owns it. The fact that he has debts does not inhibit his use of the property, even for profit. Most mortgages have a clause giving the Lien Holder rights to rental income, but it is very hard to enforce.

Here is a case study from my own neighborhood:

Tenant has been paying rent for three years. He just signed a one year extension a month ago. Tenant receives a call from a prominent local REALTOR who states the following:

a) I am going to short sale the property
b) I need you out by September 1 (35 days)
c) I can't start the short sale until we get the rental income off the sellers financial worksheet
d) You don't have to pay August rent

The Tenant calls me in a panic asking for advice. They have four children in the school system and a lease in full effect.

The answer:

The lease stays with the property on a normal sale. The short sale is a "normal sale" in every way except the seller is negotiating his debt with his creditor. Which has nothing to do with the existing Tenant. The Tenant does not have to do anything, the lease is in full effect and good for another 10-11 months. If the property ends up in Foreclosure the Tenant is afforded some protection by the PROTECTING TENANTS AT FORECLOSURE ACT effective May 20, 2009. If the property will be purchased as a primary residence the Tenant will have 90 days to remain in the property. If it is not purchased as a primary residence, the Tenant can occupy the property for the remaining term of the lease. TELL THE REALTOR TO GO JUMP IN A LAKE!

The Tenant should be furious and the REALTOR embarrassed that she conducts business this way. As a side note about six months ago the Tenant thought they might be moving and approached this same REALTOR about the penalty for breaking the lease. The REALTOR was unwilling to negotiate.

Make sure that you pay all rents when due. Any alteration to the Lease terms must be in writing and signed by all parties. A common trick is to tell the Tenant "they don't have to pay rent" then when they don't pay claim that they have defaulted on the lease terms.

What can Tenants do to protect themselves?

Unfortunately the way the system works the Tenant is at a real disadvantage. There is no way of knowing what will happen to a property or Landlords future financial situation. At a minimum prospective Tenants should do some public records searching. Mortgages and Civil Foreclosure complaints are public records and can usually be found in county records. Many Landlords have been renting property that is already in active Foreclosure just to make a few bucks before they lose the property. Renting this type of property can be avoided with a simple search. Do an analysis of the landlords finances in public records to get an idea of who you are dealing with. If the mortgage is for $200,000. and the taxes are $4,500 a year, it is obvious that your $1200 a month does not pay all the bills. If you can have a conversation with the Landlord be up front and ask hard questions. "I did a public records search and it looks like my $1200 does not pay the bills. What are your plans with the property?"

In doing this type of analysis you are looking for the strongest property owners and low debt. Research your states Foreclosure process. Many states allow Judicial or non-Judicial Foreclosure. In Florida the Foreclosure process is only Judicial meaning that a Lawsuit must be filed against the home owner. This is much more public and allows Tenants a lot more time and often notice from the court. Non-Judicial Foreclosure can happen much faster with posted notices.

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Michael G. Kornitzer Broker