Helpful Articles, Tenants

Protecting Yourself From Landlord Foreclosure

Learn The 7 Things Every Tenant Must Know So You Are Not Caught Up In a Landlord Foreclosure

It’s hard enough renting when you really want to own.  And most tenants will rent a house instead of an apartment to get as much benefits of living in a single family home as possible….no noise; a somewhat private backyard for your use only; no one above or below you. But tenants beware….Landlord foreclosures are on the rise.   Along with all the other foreclosures out there, rental houses that are owned by private owners are falling into the foreclosure trap faster than you can say….foreclosure!

What’s the reason for this?  In the beginning of the biggest mortgage meltdown – ever!, many homeowners could not sell their home for this number 1 reason – they owed more than the home was worth.  This meant that troubled homeowners, owners that had moved up into another home or moved away from the state chose an alternative to selling – Renting.  But what those homeowners may not have been aware of prior to renting was that rents were not matching the mortgage payments.  Homeowners were faced with a choice of holding out until they found a tenant willing and able to pay rent equivalent to their mortgage payment, which in the current market may take a long while; or the homeowner could rent at fair market rent value and pay the difference out of their pockets, just to minimize the full mortgage pain on a second home while trying to maintain their good credit.

The issue is this; if the owner struggles to keep up for any reason, and find they cannot pay the full mortgage, even if you’ve paid your rent, this could be a problem. All it may take is a repair that the homeowner cannot pay for in addition to the dollars they have to put with your rent to pay their mortgage, and the path to a foreclosure may begin. Finally, the owners are always reluctant to tell anyone, hoping that they can get it all sorted out and back on track. When they can’t, and the home forecloses, the renter is almost always surprised.

So how can you protect yourself from this disaster? Well, the old standard rings true…prevention is better than cure. Here are 7 things to do to protect you from a Landlord foreclosure, or at least being surprised by one:

1. This one’s going to be hard, but you should try to negotiate this one statement as part of the terms of your lease, that the Landlord will need to show monthly or quarterly statements of their current mortgage account.  Keep in mind we live in a computer and color printer era.  I’m not saying any Landlord would do what-I-am-not-mentioning, but ….
2. Make sure your deposit is held by a third party.  Strangely enough, there are some renters that want to deal with a private owner and not a realtor, but a realtor does have some benefits.  If your realtor is managing the property, have them hold the deposit.  Ask them to add language in the lease contract that if the owner defaults on the mortgage while you are still current on your rent, that you are entitled to your deposit back.  If the owner has it in their personal account, and the house has foreclosed, chances are, they wont have that money and you’ll have to sue in small claims court to get it back. Sounds simple enough, right?  You could go through all that, and win the judgement, but there is no guarantee you’ll get paid.  More than likely you’ll have to spend more money, time and energy to actually collect the money. Many renters find that it’s not worth the hassle and just walk away.  Again, prevention…..cure.
3. Run, don’t walk –  to the nearest rental where the owner has no mortgage lien against the property.   This means the owner owns it free and clear.  This doesn’t mean that you’ll never risk a Landlord foreclosure.  The owner could take an equity loan out against the property after you’ve moved in and lived there a while and you may never know, and if they don’t pay it, then, here we go again. But the chances of that happening are lower with an owner that originally has no loan balance on the property.
4. Keep your eye on the mail.  While I am not advocating you open anyone’s mail (that’s against the law) other than your own, I am saying to pay attention.  If letters are coming from an attorney to the owner on a frequent basis, chances are those are foreclosure notices.  Pick up the phone and try to find out what’s going on.
5. Don’t contact the owner’s bank to find out if the property is in foreclosure status.  If you call the bank, you’ll get nowhere.  They are not allowed to divulge any information about the owner’s loan status to anyone other than the owner, or anyone the owner authorizes in writing.  You’ll find out more from the bank as to what you can do if the house has actually foreclosed and now belongs to said bank.
6. Sign up for a service like Lemon Landlord.com. When a renter doesn’t pay his rent, everyone knows. When a landlord doesn’t pay his mortgage, nobody knows… until its too late.  Lemon Landlord.com will produce the foreclosure status of any property (residential/commercial) in the US within seconds. And the property can be monitored so that if a Notice of Default is filed, an email alert is sent out.
7. Don’t always expect the realtor to tell you when the owner is in foreclosure status.  Most times they don’t know either.  The same way the landlord didn’t inform you, is the same way they may not tell the realtor.   Maybe you may want to ask your realtor if they’ve subscribe to a service like Lemon Landlord.com.  If they have then they’ll get that notification e-mail in the event a notice of foreclosure is filed against the property.

If you do find that you are in the home and it has foreclosed, contact the bank (because they will definately send you, the occupant,  a letter).  Find out what program they have for renters.  Some Fannie Mae and Freddie Mac foreclosures will allow the tenant to stay in the property and continue to pay rent while the property is on the market for sale, providing you can produce a valid lease.  While this is not always an ideal situation, it does give you a little more time.   Some banks will even reimburse your moving expense up to a certain amount providing you leave the property in decent condition.

Finally, I am not a lawyer, and because of the society we live in I have to include this small disclaimer.  Non of this article constitutes legal advice.  If you find you need legal advice, please consult an attorney.

related articles: What to do if your landlord does foreclose

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Andrea Davis is a real estate broker with 15 years experience working in the Atlanta real estate market, specializing in residential rentals and property management, residential sales and short sales.  Andrea is passionate about educating buyers, sellers and renters throughout their home acquisition process and maintains blogs at Georgia Homes For Rent, $100 Down Foreclosure, Bank Owned Foreclosure Homes and her company site CHRAtlanta.  Andrea firmly believes in the power of education and lives by the motto "knowledge is power".

Andrea's goal with this blog is to help Landlords and Tenants alike navigate through the rental home process to get the best from your rental home.