Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
I know (or believe) that there are laws in place to protect a tenant's lease in the event of foreclosure. I looked at a property today that is being auctioned online. The tenant told me that she paid her landlord 6 months in advance per LL's requirement and her lease.
What happens if I buy this property? Does she have to pay me rent? Is she protected by the prepay?
If the lease was signed after the notice of foreclosure, the lease is not covered by the tenant protection laws. If her lease is not valid, you can provide her with the appropriate notice required by state law to leave, and she can sue her former landlord for her prepaid rent.
Depends. Was the lease an arm's length transaction and at market rent values? In other words, does this renter have a relation to the previous owner? Rental contarcts are only valid after foreclosure if the transaction was at reasonable market renbt value and is an arms length transaction between tenant and owner.
If this tenant can show proof that they paid 6 months in advance, then the foreclosing bank has a right to sue the previous owner for those rents collected as they did not pay the mortgage and collected 6 months in advance knowing this full well. Sounds fishy to me.
Will, it's not a scam. I saw her lease and spoke with her and her college age daughter for 20 or 30 minutes. The LL required that rent be paid up-front. This may have been due to credit but I don't think so. The owner (who was foreclosed on) lives in another part of the house with his family. He was at work.
She thought something was up and googled the property. She saw the auction and confronted him. He told her a bunch of lies. Said no foreclosure and that the auction site was a scam.
Anyway, if she can prove up the rent payments would a purchaser be SOL? Or is she SOL? I was just wondering if anyone has run into this situation. I told her that the deposit was probably gone.
Absolute crook. He was in foreclosure at time of lease - probably why he wanted the money upfront. She told me that he said the house situation was fine and that it was taken care of in Bankruptcy Court. This tells me that foreclosure proceedings were probably started over a year ago. He filed to get a stay and it generally takes the bank 6+ months to get the house removed from the BK and then the lender has to start the foreclosure all over again.
If the lease was signed after the notice of foreclosure, the lease is not covered by the tenant protection laws. If her lease is not valid, you can provide her with the appropriate notice required by state law to leave, and she can sue her former landlord for her prepaid rent.
In either case, that should be the previous LL she would have to deal with, not you. You cannot be responsible for what the other person did to her. I understand that she might have paid 6 months in advance and now expects to live the remaining 5 months, but it should be between her, the LL and the bank. I suggest you don't make any promises to her - neither verbal nor written.
From "The owner (who was foreclosed on) lives in another part of the house with his family...He told her a bunch of lies. Said no foreclosure and that the auction site was a scam." My gut feeling is that this lease would not be enforcable as a bona fide lease. Your state deceptive trade practices law may apply especially if legal action wrt the foreclosure or default had occurred before the payment on the lease. This may be more than a civil case. I would seek legal council and possibly file a consumer complaint with the state's attorney general.
This type of stuff has been happening to tenants for a long time - well before the recent reo situation. I guess I will have to read the tenant protection law to see if advanced rent and deposits are addressed. I know that a bonafide lease is protected. I agree that she needs to look to her LL for damages/fraud/false pretense, whatever.
Laws vary from state to state, so you need to do some due diligence. But, I believe you may have a problem
Since you are aware of the fact there is a tenant in the property and are knowningly aware of the situation Vis-à-vis, by purchasing the property, you just may have implicity transfered the agreement. Effectively, she could argue that she put you on notice.
Unless you're buying this before or at the foreclosure auction - either Sheriff Sale or Trustee Sale - then it shouldn't be your problem. If you buy it as REO, then the bank has to give you clear title - the bank will have to take care of it, and chances are that a cash for keys offer will be made to compensate the tenant.
So your "what if" scenario in the OP needs to be a bit more explicit / specific about how you would go about buying it.
Ok. I get where you are going. This was an reo that went back to the lender at the Trustee Sale. Lender is now auctioning it on-line. I read the proposed contract and it disclaims any responsibility for a tenant or possession, etc.
So, does tenant protection law become a lender problem upon taking the property at Trustee sale? And, can lender then "off-load" this issue (via contract) to a subsequent purchaser?
I'd guess the answer is yes. IF I were to sign the contract containing all those disclosures and assumption of risk, then I've "bought" the problem.
I still don't know that I would have to acknowledge the pre-paid rent.
IMO, with any REO property that you buy, you've bought the problem. So, for any problem in any REO that is inflicted upon me, I take an appropriate deduction from the price that I offer; that way, even though I end up paying for the problem, the discount has already been given to me by that bank.
Cheryl, this is a really novel issue with many layers to it. I think the easiest issue is that the Protecting Tenants at Foreclosure act would be inapplicable here based on your facts because you are not the immediate successor in interest. That only clears up the validity of the lease however and does nothing for the liability on the security deposit and the advanced rental payments.
I'm sure it's nearly impossible based on the bank's perceived position of total negotiating leverage but have your agent or attorney ask for an indemnification letter. It never hurts to ask and to be honest you don't have any other choice other than to bid or walk away. If you wanted to really play dirty you could have the tenant record an affidavit of facts on the land records to put the bank on notice of the issue and demand it be cleared before closing --fyi, I am not advocating an sort of illegal or unethical behavior.
William, yes cloud the title by having tenant record lease. Too involved for me. I'll just adjust any offer based on 6 months lost rent and tenant occupancy until the 12 months expires. Now the owner - can you say 5 DAY NOTICE TO QUIT?