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Renting during a Foreclosure?

by Patti Lyles

Some circumstances let tenants off scot-free

Q: I live in a house that had a lis pendens delivered for foreclosure with 20 days to respond. I have no interest or involvement with the owner or the house. Aside from moving out as soon as possible is there anything else I have to do? Do I have any legal issues to worry about?

A: Unfortunately the financial and mortgage crisis has been a wave that has taken many innocent people along with property owners and lenders.

You, it seems, are a renter in a property that is in the process of being foreclosed. The owner of the property you live in has either fallen behind on his payments to his lender or has simply stopped making the payments.

Now the property's lender is trying to recover what it can by foreclosing on the property to sell it off and get the loan repaid.

You on the other hand may have a lease with the owner of the property. That lease obligates you to make payments to the landlord for your rent. During normal real estate markets, a lender forecloses on a home and wants the place empty for resale purposes. The lender doesn't want to be in the business of being a landlord. So the lender moves to foreclose and notifies all occupants of the property of the foreclosure proceedings and follows through to evict all occupants.

Recently, however, more and more lenders are coming to the realization that tenants are good for properties and are a good source of income for the thousands of properties these lenders are foreclosing on.

Where does that leave you? There are several possibilities.

If you live on a month-to-month lease at the property and the property owner has effectively abandoned the building, most people in your shoes do what you are doing now and pack up their things to find another place to live. In some cases and with the new laws you can stay for 60 days but the lender will be the landlord you pay rent to. Call me to find out where you stand 831-335-2100.

But if you like where you live, you might want to see if the lender wants you to stay at the property. You should contact the lender directly to see if the lender would want the rent payments to continue or if there is some way the lender can finance your purchase of the property.

Until the lender forecloses on the property, the property is still owned by (and managed by) the current owner. But lenders have the ability to take possession of the property without becoming the owner by getting the court to allow them to operate the building until the foreclosure is final. If the lender goes this route, you may find that the lender will be eager to keep you at the property.

If you have no lease but lived in the property as a guest of the owner of the property, you shouldn't have anything to worry about with either the owner of the property or the lender when you move out. You're free to move out whenever you have to or want to.

If you are a tenant on the property, your lease continues to be valid until it is canceled through the foreclosure process. In theory, if you move out early, the current owner could sue you for defaulting under the terms of your lease. But most owners who are going through foreclosure stop being landlords and abandon their responsibilities as landlords and walk away from their properties.

If you're in a situation where your landlord no longer collects rent and is nowhere to be found, and you receive court papers that order you to vacate the property, you should be able to leave the property without worrying that someone is going to sue you down the line.

However, if your landlord continues to collect rent from you and is actively managing the property, you need to review the documentation you received from the court to determine if that documentation is sufficient to cancel your lease and allow you to move out without creating a Catch 22 situation for you in which you move out and the landlord sues you for non-payment of rent.

In some instances a lender will notify a tenant that the owner is going through foreclosure and instructs the tenant to forward all future rental payments to the lender.

As a tenant, you need to make sure that the information given to you by the lender is accurate and that you do, in fact, need to forward rent payments to the lender. The lender usually will have documentation that the building owner signed authorizing the lender to collect rents from the tenant if the building owner is in default under his loan.

It all goes back to the paperwork. To figure out whether you'll have trouble with the owner if you move out, you'll need to read through your lease and the documentation surrounding the foreclosure. In addition, you'll need to talk to your landlord and possibly the lender to get more information.

If after doing all this you are concerned about litigation, please consult with a good real estate attorney.

Best candidate isn't always the highest bidder

by Patti Lyles

Q: I have put an offer on a single-family residence at $2,000 over the asking price. The property is a short sale and the bank has already received seven offers on it. The deadline to accept or deny my offer was 5 p.m. last Wednesday.

Instead of accepting or rejecting my offer, the bank contacted the agent saying they are waiting until Monday to make a decision. What are my options and what are they trying to do?

A: Here's what's happening: The bank is trying to make a decision in a timely manner and your attempt to force the issue isn't working. (Nice try, but no dice.) The property you are trying to buy appears to be a real estate owned (REO) property, a property that is now owned by the bank.

While you say it's a short sale -- a sale for less than what the homeowner owes on a mortgage --  it seems from your question that the bank already owns the home. It's now up to the bank to decide what price to accept for the sale of the home. If the original homeowner still owned the home, was selling the home, had an offer for the home that was less than the amount he or she owed the bank, and the bank accepted that lower amount, then the transaction would be considered a "short sale."

So, you have a choice. If your offer did not have a time limit on it, you can formally withdraw your offer or you can let it sit and see what happens.

Each lender has a process by which it has to evaluate each of the offers that has come in for an real estate owned property to see which one is the best -- best isn't always the highest offer, by the way. It could mean they're looking for the strongest buyer or one who is able to use the bank's financing (which is another way for them to recoup their investment.)

I'd have your agent stay in touch with the lender to smooth things along and make sure the lender has all the information he or she needs to make a decision. It's possible the lender will come back to you (and everyone else) on Monday to ask for another round of bidding. Or, the lender might simply come back and say, yes or no.

Unless you formally withdraw your offer, at that time you can decide whether to agree to purchase the property if you're given the opportunity.

By the way, I hope you're using a good Santa Cruz real estate agent or attorney. Foreclosures and short sales are tough purchases and I'd hate to see you get caught because you didn't have anyone representing your legal interest in the deal. Unless your agent is also a real estate attorney (and even if she is, she can't be both to you in the same transaction in some states), you should hire a santa Cruz real estate agent who has an attorney at her counsel.

Renters at foreclosed properties get break

by Patti Lyles

Rent it Right

Q: I'm a renter and have just learned that my home is being foreclosed. My landlord thinks the bank will evict me, because my lease began after he used the property as collateral for his mortgage (which he's defaulted on). Is there any way I can stay? I've always paid the rent and been a good tenant. --Sam S.

A: As your landlord explained, when a lease is younger than the loan that's secured by the property, and the borrower defaults, under the normal rules of the game, the lease is wiped out. Of course, the bank that now owns the property can choose to become a landlord and let tenants stay, but the majority of banks do not want anything to do with property management. They also believe that empty properties are easier to sell, despite the overwhelming evidence that a neighborhood full of empty (and possibly vandalized) foreclosed homes will mean that those homes will drop in value, thus making any sale less profitable.

There may, however, be a way for you to stay, depending on who owns the landlord's mortgage. In December 2008, Fannie Mae, the large buyer of home mortgages and loans, announced that it would allow rent-paying tenants to remain in foreclosed properties as month-to-month tenants. This is a huge development, and it remains to be seen how these bankers and number crunchers, many of whom don't know a sublet from an assignment (let alone a pipe wrench from a crescent wrench), will fare as property managers. Let's hope they do some homework and consider hiring trained property managers to handle this new division of their company.

Fannie Mae won't evict renters

by Patti Lyles

Tenants of foreclosed homes can stay if up to code

 

Fannie Mae will allow qualified renters to sign month-to-month leases and stay on in homes it forecloses on -- without requiring a security deposit, credit check or payment history -- while it markets the homes for sale.

The new National REO Rental Policy is intended to limit the disruption to the lives of renters when their landlord is foreclosed on, and "bring a measure of stability to communities impacted by high foreclosure rates," said Fannie Mae Chief Operating Officer Michael Williams.

Freddie Mac is reportedly developing a similar policy. Fannie Mae's program applies only to renters -- not the owner of the property or their immediate family -- and requires that homes meet state laws and local code requirements for a rental property.

All types of single-family property are eligible for the program, including two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Properties with loans insured by FHA will require approval from the Department of Housing and Urban Development (HUD).

Rents will be set at market rate by reviewing local comparable rents, conducting a neighborhood survey, or using "other relevant indicators," Fannie Mae said. Properties will be managed through a real estate broker/property management person like me, which will be required to coordinate property repairs and respond to any property safety issues.

After a foreclosure is complete, renters will be offered a "Cash for Keys" incentive payment to vacate the property, or have the option of signing a new month-to-month lease with Fannie Mae.

It was just last November, Fannie Mae and Freddie Mac suspended the process of evicting about 16,000 troubled borrowers or selling their homes while they implemented a streamlined loan modification program intended to prevent foreclosures.

Fannie Mae said last week it was extending the suspension of foreclosure sales and evictions through Jan. 31. The company said Tuesday that the new National REO Rental Policy will be fully in place by the time the suspension is lifted.

What can renters do if their landlords are in foreclosure?

by Patti Lyles

 RENTERS KNOW YOUR RIGHTS

Lately many tenants across the United States who faithfully paid their rents on time were surprised to find eviction notices tacked on their doors because their landlords have not been paying the mortgage.  Other tenants are receiving "cash for keys" offers from the banks that reposessed the homes.  If you are a renter, here are some precautions you can take to make sure you do not face an unexpected foreclosure related eviction and also a few tips on what to do if your landlord is losing the home you live in.

If you are living in a rental home now in an area with a high rate of foreclosure, then you should definitely check the public records for any liens or judgments on the home you live in.  Fortunately, many counties now have land and tax records online.  For example, for San Mateo County you can simply search for "San Mateo Tax Assessor" and find the Tax Assessor's homepage.  From there you can search for a specific address and see if the taxes are paid ontime.  If the taxes are late or in default on the property, then that is a warning sign that the property may be in financial trouble.  You can also search the land records to find any Notice of Defaults, which is usually the first step in a foreclosure in California.  If public records are not available online where you live, then you could go to the county seat and search for the record at the county offices.  Public records are available to anyone, but some offices charge a small fee to do a search for you.  You can also find detailed information such as which bank holds the mortgage on the home, and what the mortgage amount is.

Another way to check if the home you are renting is in financial trouble is by searching the local real estate listings.  It is possible that your home is on the market as a short sale and your landlord did not inform you.  If that is the case then the home is probably about to foreclose.

If there is any sign of financial distress then it may be a good idea to speak to your landlord and ask what is going on.  If your landlord tells you everything is okay when there is a Notice of Default in the public records, then he or she may not be completely honest with you and it is probably a good idea to find a new place and get your security deposit back.

If you already received a "cash for keys" or eviction letter from the bank then you should also check the public records to see if the bank already owns the home.  If the bank is indeed the recorded owner then you should definitely stop paying your old landlord rent.  At this point you could either pack your bags or try to negotiate with the bank.  Some banks may prefer to have occupied homes because they are less likely to be vandalized so in rare instances they are willing to sign new leases, but you still have to be ready to leave when the home sells.

Eviction laws under foreclosure have changed last year but only a small amount of landlord & tenants knew the laws. always know your rights in a foreclosure related eviction. 

However, this is not true in every state so you must research if a legal battle is worthwhile for your situation.  Fighting an eviction also makes a renter undesirable to other landlords in the future even if the renter wins so you must make sure that you are willing to take that risk.  
 

The good news is that the powers that be are realizing that these unjust and surprising evictions are becoming problematic for many communities.  In July California passed a law that gives tenants a 60 day notice to leave a rental unit after the property is sold in foreclosure, and last month.    Hopefully other banks will follow suit and keep the good renters in their homes as long as they need. For now, if you are a renter, remember to protect yourself by verifying the ownership and financial status of a home through public records. Since landlords usually run credit checks on tenants, I think it is only fair for renters to find out the financial situation of their landlords.  Hopefully in the future landlords will be required to disclose their financial troubles for the benefit of renters.

Tenant of a property facing foreclosure

by Patti Lyles

Foreclosures

If you are a homeowner or the tenant of a property owner who is facing foreclosure, or has lost the property through foreclosure, there are thousands like you through California faced with the same dilemma.  Under the law, you are entitled to no special treatment because you used to be the owner, now because you had a lease with the owner. You are basically treated the same as any apartment tenant being evicted for no reason.

The bank does not have to talk to you, work with you, consider your family or children's education, or even try to sell the property to you. Junk yard dogs seem to have more manners and common sense than the people you will probably meet to tell you to get out. You can't pay them for more time, or even expect courtesy when they want to show the property to new buyers or realtors while you're still living there. Out! Out! Out! is what you get, in most instances.

Occasionally, a bank will offer "cash for keys," where they tend you some money to move out without a fuss. Sounds good up front, but what if you move and they don't pay you? Even agreements looking like they promise payment can be invalidated by having you sign, but they don't, or by having someone sign who doesn't have authority, or can't be found later, or not giving you a copy. The real zinger for tenants of the former landlord is that you sign off your rights in exchange for the money. What rights? You have the right to get your full security deposit back from the bank, because it is the new owner and the current owner owes you your deposit, even if they never got it from the old owner. [The exception is where the former landlord pays you the full deposit beforehand.]  The "cash" that you're getting is almost always less than the full deposit, so that when you sign the agreement, you give up the bird in your hand for two in the bush. The bank has the obligation to pay you the full deposit, not just a part, so your "cash for keys" agreement has you giving up the rest of your deposit, and then you have to find your former landlord, who may very well have filed bankruptcy. All that glitters is not gold.

Another quirk in the legal system is where a desperate property owner is met by the vultures who have seen the recorded Notice of Default indicating a pending foreclosure. They prey upon the desperate and often use "we can help" devices like an "equity purchase" where they "buy" your interest in the property under the guise that they will cover your mortgage payments for a while until you can financially recover, and you pay them "rent." As you can expect, they don't pay the mortgage, but just collect your "rent," and let the property continue through foreclosure. If you are one of those, you have the right to sue them but the bank's foreclosure will probably continue.

The time line on a foreclosure is this: Usually after a few months of mortgage delinquency, the bank records. posts, and mails a Notice of Default, giving the owner 90 days to bring the account current. If that doesn't happen, the next step is the bank giving a 30-day Notice of Trustee's Sale, which is also recorded, posted, and mailed. The trustee's sale is the auction where the property is sold to the bank or a new buyer. Just before the trustee's sale is the time when many property owners file for bankruptcy, because they will be hit with a huge tax bill when their mortgage is no longer their debt - the IRS sees it as "income."  Therefore, owners file bankruptcy, which stalls the eviction for about a month or so until the bank can get the bankruptcy judge to let them proceed with the foreclosure and eviction.

The time line on the eviction is this: After the foreclosure sale, it takes a few days to record the deed, and then a Notice to Quit [or similar title] is given to the occupants of the property. The notice gives 3-days to the former owner, but often includes a separate Notice to the tenants, giving the statutory 60 days to move out. This is like any other eviction notice, in that it has to expire before they can file the eviction case.

If the local rent control applies to your dwelling, and you are a tenant, it may prohibit your eviction due solely to the foreclosure. Santa Cruz does not have has such protections for its tenants. The fact the the bank starts the eviction, and seems to have a clear-cut case is not necessarily the situation. Due to the large volume of foreclosure evictions, the eviction firms often hire temporary staff who are poorly trained and make all kinds of mistakes in the eviction paperwork and process. Therefore, if you stay and fight the eviction lawsuit, you can stay in possession for a longer period of time, often months, and even work out a settlement where, if you just go, you owe nothing for all that time.    

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Contact Information

Photo of Patti Lyles Real Estate
Patti Lyles
Century 21 Showcase, REALTORS
P.O. Box 67275
Scotts Valley CA 95067
831-335-2100

DRE #01385517