My phone rang the other day, and the conversation that ensued was so familiar it might as well have been scripted.
On the other end was a family friend who rents a home. She was flipping out — understandably — because it had dawned upon her that her landlord had not been paying the mortgage for months, despite the fact that she’s paid her rent on time, every month, for years.
Now this outraged tenant, who had been wiping her brow in relief at being a renter and having escaped the financial devastation that hit her homeowner friends over the last few years, is coming home to foreclosure notices tacked on the door. She’s feeling like an innocent victim of the housing crisis, in general, and of her not-so-innocent landlord, in specific. And she’s totally bewildered about what to do next.
Unfortunately, I know the drill. I get at least one or two calls or emails or direct messages or tweets about this precise issue every week.
In my experience, these are usually income properties that are (a) underwater, or worth much less than the landlord owes on them, and/or (b) producing negative cash flow for the owner. Often, the owner’s adjustable-rate mortgage (ARM) or interest-only ARM has adjusted upwards, and the rent is no longer sufficient to cover the monthly loan payment, taxes and insurance on the property.
So, rather than endangering his own home or personal finances, the owner decides to do what the banks, hedge funds and pension plans do: offload the toxic asset by ceasing mortgage payments and letting the home go to foreclosure. Then the owner decides to go one step further, saying nothing to the tenant about the looming foreclosure on the property while continuing to collect rent.
I get it. It varies by state, but mortgage servicers are taking anywhere from 16 to 22 months after the first missed mortgage payment, on average, to foreclose on a home. This reality is quite literally creating a nation of squatters, as it seems nothing short of crazy not to live in the place, mortgage-free, while the lender takes their sweet time getting around to repossessing the place. If the property was only an investment, it seems even crazier to landlords not to squeeze every cent of rent out of it before the lender takes it back.
The problem is that, while the home might only have been an investment to them, it is very much a home to the tenant. And it causes the tenant untold distress and pain to feel that her housing is insecure and she could be asked to move out any second despite the fact that she has always paid her rent.
I’ve seen many immediately reverse their gloat-worthy preference of renting over homeownership once they realize that they could be evicted, through no fault of their own. In fact, it seems that the homebuyers I’ve seen recently with the strongest sense of urgency have been renters who are seeking to buy and move in before they are evicted by their landlord’s bank.
I offer my advice and answers to these tenants’ frequently asked questions by rote:
(a) Legally, you are still obligated to pay your rent. Under your lease, you pay rent in exchange for living there. And the landlord’s contract to pay the mortgage is with his bank, not with you, so he has not breached it — yet.
(b) But, lots of tenants do stop paying the rent once they realize their landlord is in foreclosure, because many landlords won’t make a move to evict them under the circumstances, so
(c) be aware that if you do stop paying the rent, your landlord does have the legal right to hit you with a demand to pay or move out (so, if you stop paying, save your money or have a Plan B for a place to live), but
(d) it is likely to be months — even years — before the bank will foreclose on the landlord, and once it does, a 2009 law prohibits the bank from kicking you out before your lease is up. In fact, even once it is up, it must give you 90 days to move out.
Ultimately, the advice I’d like to give is not to the tenants, but to the landlords. Before you strategically default on your income property’s mortgage, think about the consequences your actions have on your tenants and their children, whose rent payments have afforded you the ability to profit from your property ownership over the years. Many tenants of foreclosed homes I’ve talked to would have stayed and continued to pay with a rent reduction and a lot of advance notice about what was going on, from the landlord. Of course, others would move immediately once they knew a foreclosure was in the works, and that’s a risk landlords face.
Once you have tenants, a property is not just an investment — you become responsible for providing a home to someone. Your financial issues should not be inflicted on them. Be upfront with them, and your karmic load will be lighter, even if the financials don’t work out the way you wish.