How do you actually enforce an Assignment Of Rents in a mortgage?

Question

This may sound simplistic, but I'm looking at trying to buy NPN's on a 4 plex or two.  I would like to collect the rents while the mortgage is working it's way through the foreclosure process, to off set costs.  If the mortgage has an Assignment Of Rents, I obviously would have to give some type of notice to the tenants and owner, but how could I enforce this upon the tennants, assuming I have an uncooperative owner?

Gabe K. · Answer

Bill GulleyGuys, I have this very same situation, foreclosing on a duplex.  My lawyer says it may or not be worth pursuing because I would have to start maintaining the property also.  Thanks.

Bill Gulley · Answer

Pretty much as Dion mentioned, I've not had an issue in SFD, larger multis can especially when a property manager is under contract and letting new leases, the lender can refuse, but if they do, they are limiting the contributions to be credited to the loan, so best to stay in business. Same with other commercial. With a SFD, it's not an issue as the contribution is less than the benefit of having a cleaned out property to market, so you collect rents while due and don't renew. :)

Dion DePaoli · Answer

I have done AOR before.  Usually in situations where the Borrower causes stalls on the FC or in other situations where I felt necessary.  I have not had issues with property maintenance outside of what I would consider normal concerns for preserving the property.

There is an event/idea called "Mortgagee In Possession" which can sometimes occur when a Mortgagee steps in taking possession of the real property while finishing foreclosure proceedings.  This is more of a commercial property concern than a residential.  MIP can cause liability to the Mortgagee for being in possession of the real property which exceeds the typical role of a simply preserving and securing.

Like I said, I have not seen that situation arise in residential situations nor does simply enforcing the AOR create such a liability since you are acting to only take what was assigned (the rents) which does not include possession of the real property.  Bill G may have some other experience/insight.

Spencer B · Answer

Assignment of rents enforcement is easier said than done on small 2-4 unit income properties, especially those where the borrower is occupying one of the units.

I've foreclosed on several of these, and each time we've found enforcement more of a hassle/expense than the upside.  Many times the tenants have a close relationship to the borrower, being their neighbor and landlord, plus the borrower is most likely skimming rent so they will work out a deal with the tenant, such as below market rent.  If you can't get voluntary collection, you can attempt legal enforcement through your foreclosure atty (assuming a judicial state) but then you'll start spending more in legal fees than what the rental income is worth.  Additionally, this can lead to pissed off occupants who may decide to vacate and destroy the interior on the way out.

With that said, I'd give it a shot depending on the circumstances, but if it doesn't stick initially, you'll have to weigh the financial benefit of going the legal enforcement route.

Wayne Brooks · Answer

Thanks Bill, I figured you'd been there, done that.

Bill Gulley · Answer

If the note or security agreement contain provisions for the right of set off, you give notice that you are doing so to the owner and tenants. The notice should contain the statute allowing set offs and penalties under the law for failing to comply. Fot the owner it can be fraud or theft, for the tenant, failure to pay rents. To enforce the matter it becomes a seperate matter from the foreclosure and you bring suit or ask for a court order, from there it can become a court matter. Generally, notice to enforce any setoff needs to be 30 days prior to rents being due. Check in your state for specific requirements. :)