I have just started investing in foreclosures on courthouse steps. I have always heard it is best to kick out the old owner and start fresh. However, if you could The Property Report last week in WSJ they profiled hedge fund GI Partners which has committed $250m to buying at foreclosure auctions and renting to tenants. What caught my eye is that their business model calls for first trying to make deal with old owner to stay in property.
Anyone have experience to share?
We converted two prior owners to tenants in houses purchased at sheriff sale this year. Compared to other acquisitions, these required far less improvements, had zero vacancy due to turnover and have turned out to be our best performers.
Our state has a 6 month redemption period. This allows a long time for a property to deteriorate or get stripped by the owner. If the property goes through a winter we usually run into plumbing issues due to lack of winterization. When owners stay in the property we eliminate these issues. So far both prior owners have been on-time with all payments.
We've had a good experience and I would recommend giving a prior owner a shot.
If they couldn't pay the mortgage, how will they pay the rent? Isn't your rent higher than the mortgage payment was?
Both our owners had job losses and since were re-employed. Credit obviously took a hit due to foreclosure. Rent is lower; $800 vs $1,000 mortgage payment.
after trustees sale here in CA, I do rarely if they are a holdover tenant(not ooc) and entitled to a 90 day notice. the battle on collecting market rent, or any rent during that period factors into the decision. My criteria is a good source of income, and a cosigner with a good credit.
If they seem to be lawyered up and want to play eviction delay games also factors into my decision. if they are going to seem to be able to delay an eviction for 4-5 months then its worth a gamble under the right circumstances. but only do it about 5% of the time.
Just wanted to share my experience. I bought a house on courthouse steps last week, and by end of week I had already cut deal with former owner/occupier to pay market rent plus security deposit. I think this is win/win with little downside. The guy really wants to stay in his house, and has extensive backyard landscaping that he values highly (but would be negative if I had to maintain or tear out for next tenant). I usually budget 10% vacancy per year, but for this property I zeroed that out, effectively raising my return. I will be using this same approach in the future, and wanted to share my experience.
I had read that BANKS.. look down on this.. I personally say F the banks.. This is something I would love to get in on doing.. How IF you short sale the property.. then why wouldnt rent be cheaper than a bloated underwater mortgage payment!
Steve, the OP is asking about foreclosures where you have no restrictions. In a short sale, renting back to owner will generally be forbidden, not just frowned upon. A sale could be unwound, or fraud pursued if you did it.
Interesting group of experiences on this thread; I would have expected them to skew to be much more negative.
My experience has been that all former owners must eventually go, and that is the problem. Former owners are typically still attached to the house, the neighborhood, etc. They'd rather not have their neighbor friend see them move.
An experience early in my investing career caused me much personal financial pressure. Bought from owner in foreclosure and arranged rental agreement with the former owners. Not only did their old habits persist (which I presume contributed to their inability to pay rent to me) but the couple filed serial BK's in different courts which effectively delayed eviction for over 9 months. This was over twenty years ago and the BK courts could be misused more easily however I still believe it possible for super-flakes to delay a U/D for an extended period of time.
I have let other former owners remain, though. This has since been my practice:
I explain that, in order for them to remain, I am willing to rent to a friend or relative however they must not be currently living in the property AND they must have a job or otherwise qualify. This makes sense to them: landlord wants to see a tenant who can pay rent (or at least on paper). The former owner is not listed on the lease and this eliminates any later claim that I promised to re-sell the house to former owner at a later date (a common claim here in CA).
This accomplishes several things for me. If I have to evict the residents, they're only the unauthorized sub tenants of my lessee. My lessee is not inclined to resist the U/D and usually defaults. Lessee has effectively given me a guarantee for which I can also obtain a money judgment in addition to possession. I can even levy on that judgment later on their assets however I have never taken things that far.
The one thing that you can't get back is the lost time. For this reason, I still love paper (notes). You don't loose rent for money (aka "interest") if the security is good.
Done this and often. We always consider the borrower as the first tenant resource.
There is a pride of property ownership. This really only comes from folks who want to stay in the home and have plans of one day being able to repurchase the home back.
My only complaint is that in some cases that laundry list of deferred maintenance the husband/boyfriend put off on the property will usually end up on your desk as a new landlord. To some extent, you can get some chuckles out of the stuff they request. After the first couple sets of these we did, we put some plans together, asset specific, with the ex-borrower/new tenant related to the repairs. This helped ease the relationships in those situations where we didn't want to become the new handyman husband with a pocketbook.
I don't think it is a universally applicable concept. If the tenant can't pay, they can't pay and must leave. It must be on a case by case basis.
One good story to this idea we had was foreclosing a family where the child had gotten extremely sick and hospitalized. The mother, who made the most money, was forced to quit her job to take care of the child for father/husband career reasons. The mom, could get a job again when things got cleaned up, the husband would have had a tough time and the husband had good benefits but a low salary. By the time we finished foreclosure, the wife had gone back to work and they were making good money again. We allowed them to stay in the home they started their family in and eventually purchased the home back from us. I think these types of situation are just as abundant as having some deadbeat borrower or straw borrower, but you have to look. Doing what we do and being able to add some additional value and help out a family does give a greater sense of accomplishment to the task, IMO.
I think perhaps this is a tough conversation to have and the knee jerk reaction is simply get a new tenant to extinguish the baggage. I could understand how some more landlord types may not like having to really dig in to see and give a chance to the borrowers to turn things around financially.
I've done this many times, when the circumstances are right. When doing this, I have the former owner / new tenant sign an addendum to their lease that requires them to admit that the foreclosure was properly conducted, their ownership rights have been extinguished, they have no equitable title claim, there has been no promise to re-sell the house to them, and that their interest in the property is the same as any other tenant, and acknowledge that failure to pay rent will result in the service of a three day notice to quit followed by eviction if not cured. This sets up their expectations at the outset and will be used as a defense to the typical claims made by former owners when evicted post-foreclosure. You should have your counsel draft such an addendum to protect you before you ever allow a former owner to remain as a tenant.
I don't like it. I would not do it.
They didn't pay their mortgage and lost their own house. If they don't pay you what can you do to them that is worse then that?
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