Screening a tenant undergoing a short sale

3 Replies

BP'ers--a prospective tenant who is undergoing a short sale on their home wishes to apply to rent one of my units. As their credit has been damaged by the short sale, they have offered what they claim is a qualified co-signer. In addition to the co-signer, they are willing to provide me with proof of employment, references, bank statements, etc. to prove the ability to pay the monthly rent. The married couple are both professionals and claim to earn a gross monthly income of 3x the rent amount (to be verified by me).

I have a rigorous screening service for criminal, credit, eviction, and employment verification which I will use to process applications for the married couple and their qualified co-signer.

I've read that renting to a tenant undergoing a short sale is fraught with risk because the short sale may never occur, which would result in foreclosure and could pressure the tenant into bankruptcy during the lease period. Although more recent federal bankruptcy laws contain more protections for landlords, I've heard that it is still possible for a tenant who files bankruptcy to avoid paying 1 - 2 months of rent before they may be evicted. 

Assuming the co-signer passes my screening process and I lease up this new tenant, the co-signer will be required to pay the rent no matter what. Is this right? If so, this would cancel out the risk of non-payment due to bankruptcy. right?

Are there any additional risks in this scenario that I'm not considering?

What other questions should I be asking the prospect?

I don't understand short sales very well, so, I don't know what I don't know.

I don't know whether the short sale has a closing date established or not yet...

I have not yet processed this prospect through my screening service as I wanted to learn more about implications of their short sale before moving forward.

I'd really appreciate some help from experienced BP'ers (@Marcia Maynard ) out there on how to conduct my due diligence around this prospect who is undergoing a short sale. Please advise. @Brie Schmidt

Note, my unit is located in the City of Chicago and subject to the Chicago Landlord-Tenant Ordinance.

Medium logoDanny Duran, Danny The House Buyer | 602‑677‑2149 | http://www.dannythehousebuyer.com/

Your risk is they don't pay then you have to go after the co-signer.  

@Danny Duran I would ask the story behind the short sale.

I have tenants now who had a short sale.  They were both sign language teachers at a tri-county special ed school.  The school system decided to close the school and integrate the children into mainstream schools and they both lost their jobs.  When they came to me 18 months ago the husband had just been certified as a interpreter and had two jobs.  They met the 3x income and the only negative items on their credit was the short sale.  So far they have not missed a payment.

Another time I had a couple with a foreclosure, they had bought a condo during the boom that was 50% completed when they closed.  The builder went bankrupt and stopped work and the city was condemning the building and they were told to stop making payments.  I called the city and confirmed this information and was prepared to rent to them.  When I pulled their credit they had recent judgements and late payments on other things, so I declined them as renters.

Taking on a renter with a SS or foreclosure is a risk.  If you can hold out for a more qualified tenant then do so (If this is for Sept 1 then I would wait.  I don't even start showing my units before the 10th because all you get is people who still have options.  The 10th - 20th is the sweet spot where renters feel the urgency of making a decision but still aren't desperate)

Medium second city real estate logo   white close upBrie Schmidt, Second City Real Estate | [email protected] | http://www.SecondCity-RE.com | IL Agent # 471.018287, WI Agent # 57846-90 | Podcast Guest on Show #132

@Brie Schmidt thanks for the input. 

This tenant has a co signer so that makes me feel less concerned about taking them on. 

Of course, I will run the co signer through my screening process and Verify their are qualified. If they do, and there are no other red flags on the prospect's screening report, I would feel comfortable moving forward with them. 

Medium logoDanny Duran, Danny The House Buyer | 602‑677‑2149 | http://www.dannythehousebuyer.com/