Foreclosing: How to handle current tenants before the auction?

Question

As a lender, I have a delinquent borrower that won’t pay and I’ve begun the foreclosure process. I am prepared to make this my own rental property if the auction doesn’t work out like I want.

The house is occupied, and the tenants are  paying rent to the borrower as far as I know for now. Would it be wise to approach the tenants before the auction to give them a heads up that the house is being foreclosed, maybe discuss a cash for keys scenario or continued paying of rent to me? I am trying to use the time wisely to make life easier down the line.

I am trying to see this from tenants’ perspective, their right to quiet enjoyment, etc. A stranger knocking on the door saying the house is being foreclosed, saying he's going to be the new owner, and offering me cash to get out in a month or to give me their rent money. Sounds like a scam. I can see a situation which the tenants will say "we already paid the rent for this month to Mr. Borrower, you'll have to talk to him", even lying about it...then getting uglier from there.

What are the best practices for what to do before a foreclosure takes place regarding an occupied house?

Bob Floss II · Answer

@Paul Winka Please understand the answer to your question is jurisdiction specific. Please ignore all the advice here and talk to local counsel. Depending upon your State and county, there are different rules about enforcing an assignment of rents.

Paul Winka · Answer

@Bob Floss II, @Rick Pozos, @Chad U.

I appreciate the advice. I am on the outs with the borrower, so I am not too worried about irritating him, hahaha, I am the one that's not getting paid. From what I know, the borrower is still collecting rents from the tenant, so it makes it even worse. Seems like assignment of rents is not worth pursuing though, even if there is a way in the law to get it, it's going to be a hassle to get for what might only be a few hundred dollars. @Bob Reinhard, I used a note that another investor I respect prepared, so there was no conversation I had about that. I was just asking about assignment of rents here first to get a variety of opinions, then engage my attorney for the specifics. This isn't a battle worth fighting. I'll just approach the tenant after the foreclosure.

Rick Pozos · Answer

It is a little tricky with rent. What if you collect rent from the tenant AND the borrower reinstates the mortgage? Now you owe him the rent and you have a pissed off landlord/borrower.

I would let the tenant know what is going on, but dont collect from the tenant until AFTER the foreclosure. And that is IF you get the property back at foreclosure. Transparency is good. This way IF you do get it back, they already know who to pay next month.

Chad U. · Answer

I highly suggest you contact an attorney and start the foreclosure process, before you can collect rents.  The tenant will be notified during that process.  Since MO is a non-judicial state, the foreclosure process is very quick and shouldn't be any more than 3-6 months, depending on how quickly the publications are advertised.

Paul Winka · Answer

Thanks for replying, @Jonathan R McLaughlin, and I agree that I do have the right to approach. It certainly isn't illegal, especially considering I do have language about assignment of rents in my note. The conversation with the tenants might go well, then they'll start paying me. If it doesn't go well, there is not much recourse, and I'll have my answer about probably having to evict or doing CFK in a short while. Most investors are not going to fake being the lender, knock on the door, and try to collect the rent going forward and bypass the one they've been dealing. How would they know I am not a con artist? Of course, how would they know the borrower isn't one either, they took his word for it being the owner when they started renting the place? I don't see the conversation going much different after the foreclosure...I won't have much more credibility then before it was foreclosed, which is why I figured I'd just have it now. Thanks for the advice.

Paul Winka · Answer

What do you say about assignment of rents then, @Bob Reinhard?

Paul Winka · Answer

@Chad U. You're right, I do have some language in the note about assignment of rents. I likely have the right to do this, but I still come back to the same issue, how to enforce it? Knock on the door, show the tenants my note (which they probably won't understand and will be highly skeptical) and say you need to pay your rent to me now since the owner (borrower) is in default? I don't expect that to go over well, but is this what I must do?

Chad U. · Answer

If you have a non-owner-occupied deed of trust and promissory note with the borrower, there is a likelihood of language in there that the rents be assigned in the event of non-payment. Also if the borrower has a lease with the tenants, you must honor that lease until it expires if it is an annual one. Therefore you may not have the right to kick them out after foreclosure. I would consult with your foreclosure attorney on this.

Foreclosing: How to handle current tenants before the auction?

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