Living rent-free in distressed property

CORRECTION: This article has been amended to correct an error. Federal legislation, enacted in May 2009, provides that tenants of a foreclosed property must be given at least a 90-day notice before they can be evicted.

Q: We are in preforeclosure renegotiation of our first trust deed loan on our rental home. The loan on this investment property was a low teaser rate for the first two years but now the interest rate has been adjusted higher and our payments have increased by several hundred dollars per month.

We actually would have been OK with the higher monthly loan payment, but the rental market in our area has also been hard hit. There are so many vacancies that we had to lower the rent after the last vacancy. So the lower rent combined with the higher expenses means we have to invest additional cash each month and we are quickly depleting our savings.

We are not the only real estate investors in our area with this problem. However, we are the only ones (with) a tenant who also seems to be taking advantage of our tough situation.

We rented the property seven months ago to a couple and told them that we were in the process of a loan modification. They seemed to understand and wanted only a month-to-month rental agreement because they were going to be looking to buy a home soon.

They moved in and paid the first month's rent and the security deposit, but they have refused since then to pay any rent because they say they are worried about the potential foreclosure hanging over our head and the house. They also claim that they were told by an attorney that if we are not making our loan payments they don't have to pay their rent until we prove to them we are current on our loan.

We recently gave them a legal notice demanding the rent, but still no payment or response. Can they just continue to live here without paying any rent while we continue to negotiate with our lender? Will we need police to get them out?

A: Whether you are in a renegotiation of your loan or made all of your loan payments is not a legitimate reason for your tenants to withhold rent. There are many landlords who are not forthright with their tenants about the stability of the ownership of rental properties and there has been a push for legislation in many parts of the country to require landlords to provide full disclosure and/or lenders to honor certain minimum rental terms.

But I seriously doubt that an attorney gave them the advice to not pay the rent unless you prove you have made all of your loan payments. Besides, your tenants knew exactly what was going on when you rented them the property and they agreed to a month-to-month rental agreement. ...CONTINUED

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