DEAR BERNICE: We’re renting a home in an area where real estate prices have plummeted by about 25 percent. Our landlord owns two other properties in the area, one of which is vacant. We saw a foreclosure notice posted on the vacant property. We’re concerned that if the landlord is letting another property go to foreclosure, he may not be making the payments on this property either. We fear the landlord will just pocket our rent money and leave us stuck in a mess with the bank. Is there anything we can do? –Phil B.
DEAR PHIL: The first step to take is to find out the foreclosure process for your state. An excellent resource is RealtyTrac, which provides a detailed explanation of the foreclosure laws in each of the 50 states.
In some states, it can take months to go through the process. In others, the foreclosure can take place in just a few weeks. In most states, the foreclosure process begins when the owner falls behind on his or her payments. The lender sends the owner a letter demanding that the owner bring the payments current or else face a foreclosure proceeding. Usually, the owner will have less than a month to bring the payments current. In practice, however, this can take much longer due to the huge number of properties in default. As a result, an owner may be delinquent and yet not receive a demand letter from the lender for a number of months. This is sometimes called the "pre-foreclosure period."
In most cases, you won’t know if the owner is in default until the process moves to the second step. Once the owner defaults, the lender normally files a public notice that begins the formal foreclosure process. In some states, this is called a "notice of default," or "NOD." You can find out whether your rental property has a NOD by checking the public records. In most cases, this would be found at the county clerk’s office or at the county courthouse where the sale would occur. This information is also sometimes available through a local title company as well.
Once the NOD has been filed, the next step is to schedule the sale of the property. This is where it gets tricky, especially if the property is a rental. For example, if the home was purchased as the owner’s primary residence and the loan in default is the original mortgage, the lender’s only option may be to foreclose on the property. This is an important distinction, as it can influence whether the lender can foreclose using a nonjudicial foreclosure.
In most cases, when there is a nonjudicial foreclosure that involves a "purchase money" loan (i.e., the loan was placed on the property when the owner purchased the property), the lender’s only option is to take the property back. The lender cannot go after the borrower’s other assets. On the other hand, if the owner bought the property as an investment or has put additional financing on the property since the purchase, the lender may have the right to go after the owner’s other resources, including the rental payments that you are making. …CONTINUED
For example, one of my clients was renting a property where the owner was facing foreclosure. The owner also owed money to the Internal Revenue Service (IRS). The IRS came knocking on his door and instructed him to make payments directly into an IRS account. My client’s attorney advised him to pay the money into an escrow account until the courts could determine how the money should be dispersed. It was quite a mess.
The good news is that even if there is a foreclosure, the new "Helping Families Save Their Homes Act of 2009" does provide you with some additional protections. If your house sells to someone who intends to owner-occupy the property as their primary residence, the new owner must give you at least 90 days’ notice before they can have you move out of the property. In all other cases, the new owner must honor the terms of your current lease.
If the property goes back to the lender and does not sell (or if it sells to an investor), the lender/investor must honor the terms of your lease. At the end of the lease, the new owner may end your tenancy by providing you with a 90-day notice to vacate. The 90-day provisions also apply to month-to-month tenancies.
In terms of your present situation, you don’t want to be in the situation where you are paying the landlord if the bank has foreclosed on the property. Monitor the public records for a foreclosure notice on the property. If a foreclosure is in process, consult a real estate attorney to determine your rights as well as how to handle the rental payments. The most important thing is to keep your payments current. That way, if the bank or some other person becomes your new landlord, you will still have at least 90 days before you will have to think about moving.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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