Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes
Hi all,
I just purchased a property via trustee sale at the county courthouse steps in texas, and then learned that the previous owner agreed to rent the property to a couple before the sale. Do I have to honor that lease agreement or can I ask them to leave?
Normally, the foreclosure will wipe out the lease. However, there is a provision in the Preventing Mortgage Foreclosures Act (see TITLE VII—Protecting Tenants at Foreclosure Act, section 701) that may apply. If the lease predates the foreclosure notice, they have 90 days to move out. If the lease was made after the foreclosure notice, they don't have the 90 days.
You can have them evicted or go the easier route and offer them cash for keys. The previous owner commited a form of fraud by leasing and collecting payment to the property while in foreclosure and not paying the bank. The bank who was foreclosing is entitled to that money.
You have that leverage to threaten that you will turn them in unless their renters leave now. (I am not an attorney and am not giving legal advice, just my opinion)
I suggest you seek the advice of your legal counsel.
Normally, the foreclosure will wipe out the lease. However, there is a provision in the Preventing Mortgage Foreclosures Act (see TITLE VII—Protecting Tenants at Foreclosure Act, section 701) that may apply. If the lease predates the foreclosure notice, they have 90 days to move out. If the lease was made after the foreclosure notice, they don't have the 90 days.
In addition to what Jon said, there may also be a rare situation where the lease predates the loan itself. In that case, the lease may have priority over the lender's security interest. I am not sure what will happen if the mortgage, by its terms, states that it supersedes any prior leases because the lessor can't waive a right that belongs to a lessee.
Also, if the lease that was entered into prior to the loan states that it will be subordinate to any subsequent lien on the property, then it automatically becomes junior to the lien.
Will,
I was stuck in a similar situation here in California. Unfortunately, since the person you are trying to evict was the tenant of a previous landlord, you have to give a 90 day notice then proceed with your lawsuit.Your best bet is to offer cash for keys (start off at $500 and go up to $2,000). Also, I suggest that you some how convince the previous tenant to let you inside the house and take pictures just in case the situation turns out to be messier than expected.
Thanks for the due diligence Jon, as usual spot on.
This is a big scam homeowners have been doing, not paying their mortgage renting the place out and keeping the dough which is rightfully the lenders.
Hi Will! I read some of your comments and I really have to give you a pat in the back for been so successful!
How do you find the deals!!! I am having the hardest time.
I did the trustee sales, it's hard and you have less competition b/c you are dealing w/ 100 cash buyers so you weed out the private lenders, hard money lending competition etc...
But there's a lot of research needed for trustee sales like taxes, liens, and make sure it's not just the 2nd you are bidding on etc..
The MLS listings, it's a BIDDING WAR!!!! I am so frustrated!! IT would take me months and months and months to find a deal and to be outbid or multiple offers!
Cashflowllc, I totally understand what you are going through as I have been in the same situation here in austin. This particular deal happened only cause I met the owner many months before the default and trustee sale AND he was cooperative. Otherwise the only guys getting deals around here are the one marketing to distressed owners before default , and that takes some real genius to position correctly. The only way to get some traction may be to pick a neighborhood that is not overrun with investors and dig deep. Make contact with property owners that are not on the market, talk to as many people in yor canvas area as possible, search 90 day old listings and make tons of offers. You may have to wade through many offers before a deal pops up.
Normally, the foreclosure will wipe out the lease. However, there is a provision in the Preventing Mortgage Foreclosures Act (see TITLE VII—Protecting Tenants at Foreclosure Act, section 701) that may apply. If the lease predates the foreclosure notice, they have 90 days to move out. If the lease was made after the foreclosure notice, they don't have the 90 days.
I had saved this thread for a reason - and after a lengthy conversation with counsel today, felt it necessary to correct or clarify the prior responses with respect to (i) leasing while in default, and (ii) the PTAF Act.
First off, it is NOT fraud nor is it illegal for the owner of a property to have an existing lease while in default since the owner still OWNS the property and technically can cure the default anytime up until the title or ownership changes hands. There is, in fact, state law (NV) that protects the owner of record and upholds the lease and the owner can evict the tenant for breach of the lease/failure to continue to pay rent. Now, if the owner leases the property subsequent to a Notice of Default, then some states (i.e., NV) require that the tenant be disclosed in writing of the NOD. Again, the lease is upheld and perfectly legal, so long as the disclosure is made. An "assignment of rents" clause is sometimes included in the lender's note or separate document which gives the right to the lender to collect rent in the event of a default, but like the obscure due on sale clause, is rarely enforced.
Much to my surprise, the PTAF Act specifies that the lease be "entered into before the notice of foreclosure to occupy the premises" in order for it to be held valid in the context of the Act.
According to counsel, a "notice of foreclosure to occupy the premises" is clearly not the same as a NOD or "foreclosure notice", therefore, a lease entered into after the NOD is filed but before a foreclosure eviction notice, would be upheld under PTAF. I brought up the fact that this definition ambiguity is probably not yet supported by any case law given the the act is so new and hasn't been litigated enough for us to really know. Thus, the definition of it could be subejct to interpretation.
Again, according to my counsel, a litigator himself, most courts will decide in the favor of the innocent party, the tenant, since that's what the act is designed to protect.
Nonetheless, I would still advise those of you renting to tenants pending foreclosure proceedings - or buying defaulted properties from owners with tenants to confirm with competent counsel, as every state has different statutes with respect to foreclosure and tenants.