Rental Property Investor · Boca Raton, FL · Member since 2014 · 1k+ posts · 713 votes
When buying a recent property in New Jersey, I was personally inspecting the property with the realtor when I began to make small talk with the current owner. He was upside down on his mortgage, and had come to accept the short sale process. He began talking about how he had decided to stop paying his mortgage and is now dealing with the consequences. He reached out (via the realtor) that he would like to be my tenant so he didn't have to move out. The contract says the house will be vacant and I already have a prospective tenant. My thoughts are... It would be nice to take a property with someone already moved in. He didn't take great care of the house, as it needs approximately 10k in repairs... He's been there for 15 years. I also understand that his financial situation may not have allowed him to cover those costs. My other thoughts are... If he decided to stop paying the bank, he could just as easily decide to stop paying me.
Had anyone else been in a similar situation... Where someone had stopped paying their mortgage and then wanted to be a tenant after the short sale?
Documents you will sign after the Approval Letter is issued will include an Arms Length Affidavit which will state, among other things, that there are no undisclosed agreements and usually specifically that the owner will Not be allowed to remain in the house and/or rent it from you.
Documents you will sign after the Approval Letter is issued will include an Arms Length Affidavit which will state, among other things, that there are no undisclosed agreements and usually specifically that the owner will Not be allowed to remain in the house and/or rent it from you.
As @Wayne Brooks noted there are said documents like the "Arms Length Agreement" that you will often have to sign. I carefully want to say often. I have seen some lenders lately not have such an agreement in closing packages but those are from lenders that have no plans of selling your loan and are keeping it in house. Checking out the "RESPA" rules it apears to be a gray area. Gray enough in my opinion only not to chance it. But of course you should seek professional legal advice on this...
Do not rent to him. A previous owner who stays on as a tenant would likely consider the house to be still his own and treat it as such. He would likely resist your efforts to do the changes you would want to do. His owner mentality would not change overnight into a tenant mentality. Besides, he deliberately defaulted on his loan. There are good reasons why financial institutions use documents such as the Arms Length Affidavit.
I would not do it. However, I do know a case something similar to this that has worked out, but at the same time it was a cash sell to the buyer from the owner. No bank was involved. It was also commercial real estate. In this case the buyer bought a retail property, that was split into 2 spaces. The owner of the property had to sell the building because the parent that owned the property had passed away, and all of the siblings wanted their split. They placed the property for sale, in at that the only way the owner would sell it is that they would allow that tenant to continue leasing the property for the next 5 years. It sold within six months and the leaser, prior owner of the property, signed a 5 year lease for monthly rent for more than the buyer could get from another tenant. So, after this the new buyer went to the bank, borrowed 100% of the cost of property he paid, and the prior owner/tenant, is paying more for rent than what the mortgage is on the property. Plus the new owner has rented out the remaining space and is seeing a decent income on that space as well. So, in some cases in a situation that I explained can work out providing it is a cash sell and under the correct circumstances. I thought about buying the property myself, however, I did not have the foresight in doing it.
As @Marcia Maynard Stated, the "Owners Mentality" is the biggest problem! I've been cited by various governmental agencies because I have a previous owner who has this mentality, and when I tried to sell, I got a lot of hubbub from the owner about everything. Keep them away! There is a reason that they have to sell.