After US housing bubble burst, the market experienced mass foreclosures that were comparable to the Great Depression. According to an article by Erica Tobe and Sarah Carter of North Carolina State University, from January 2007 to December 2011 there were more than four million completed foreclosures and more than 8.2 million foreclosure starts.
With number likes this, it is not uncommon for renters today to find themselves dealing with property going through the foreclosure process. This article will help explain what happens during the process of renting a foreclosed property. Since it is a likely scenario for many, it is best to be prepared and also fully understand the terms of your lease agreement.
Who are the renters?
Research conducted by the National Multifamily Housing Council shows that the most common renter is younger than 30 years old, rents a house or apartment, lives alone, and earns about $30,000 annually. It’s up to these young, first-time home buyers to be educated about the foreclosure process so that they can see can be prepared if the property they are renting goes into foreclosure. The first thing the renter can do to understand what kind of situation they might be in is to know their landlords.
Who are landlords in default?
There are certain behavioral warning signs to look for in a landlord that could indicate something is going on – such as the possibility they could default on their mortgage or the property is already in the foreclosure process without the renters knowledge. The common thread for warning signs is neglect. A landlord who is undergoing foreclosure, or is anticipating foreclosure, will invest as little time as possible in the maintenance and upkeep of the property.
Here are some examples of warning signs renters can look out for:
- Landscaping is neglected
- Signs of poor maintenance such as: ceiling cracks, unclean appliances, evidence of insects inside cabinet recesses
- Difficult communication such as unanswered calls, unreturned messages, etc.
- Evasive answers to specific questions. “Don’t worry about it” is not an acceptable answer to queries about a loose handrail or signs of a running toilet during a showing of the property.
- Curious inclusions or exclusions in the lease agreement that is out of the ordinary when compared to other lease agreements. For example: unusual charges, insurance fees, taxes, etc.
- Requests payment in cash or wired funds
What happens to tenants during foreclosure?
If your landlord is showing signs of neglect, you might eventually find out the place you are renting will go through foreclosure. When this happens, what happens to the tenants? Will they be kicked out? Fortunately, the fault is with the landlord and therefore the tenants do not need to worry about being evicted.
If a property that has tenants already going into foreclosure, the tenants keep their leases and the rent is simply paid to the new owner.
If rentals have utilities paid for by the property, these services could be interrupted if the landlord does not have the funds to pay the bill. Tenants will receive a notice from the bank’s trustee notifying them 120 days prior to the date of the property’s scheduled foreclosure sale. New owners may offer to buy out a tenant’s lease (“cash for keys”), ask them to sign a new lease or, in some states, new owners have the right to serve a 60 days’ notice to tenants if they wish them to vacate the property for reasons of “waste or nuisance.”
Who are the new property owners?
The most common buyers of foreclosed rental properties are the banks who own the mortgages or investors who purchase the property through a public sale. Investors usually hope to turn around and sell the property for a tidy profit. This quick buy low, sell high scheme is commonly called “flipping” the property.
Although the properties may continue to be leased or rented to individual households, the ownership of a foreclosed property could change hands more than once if a buyer believes they have purchased it at a price low enough to turn around and resell for a bit more. This often means a period of minimal investment to improve the marketability of the property as it is being shown to prospective buyers.
What recourse do tenants have if a landlord or a new property owner violate a their rights?
Small claims court is the place to start when attempting to reclaim monies a tenant feels they are entitled to, such as:
- Moving costs
- Application fees
- Difference, if any, between rent at new property as compared to previous rent
Tenants can take comfort in knowing their right to remain in their home is protected and that a landlord in foreclosure or a new property owner cannot summarily evict you. However, the bad news in all of this is that the most common aggravation tenants experience is neglect of maintenance. Leaky roofs, windows lacking screens, sub-standard landscaping may all become part of a tenant’s living experience. Landlords in foreclosure may lack the funds for such things.
New property owners wanting to maximize potential profit may be loathe to invest in anything but what is absolutely necessary to make the property presentable for prospective buyers, yet stay within the bounds of the law in their obligation to lease holders. For residents looking out for their own best interest, the most important thing they can do is begin to document anything relevant to the process and anticipate the real possibility of having to move to a new property in the future.