Foreclosures and Existing Tenants

VOLUME VI

What Rental and Eviction Options Do New Landlords Have?

By Juliana Torres-Mason

Purchasing a foreclosed home can be a long and tedious process. And it can become even more complicated when a tenant is still living in the property.

The good news is that a tenant could be an immediate bridge to steady income. On the other hand, existing tenants could be a liability and an impediment to making the property profitable.

If landlords discover an existing tenant living in the newly acquired property, they should be aware of their legal options and carefully assess the situation before deciding what to do.

The Legal Options

The first step to deciding whether to keep the tenants is to determine if they’ve been paying the rent. Often, tenants who learn that their home is in the process of foreclosure will stop making payments altogether.

They shouldn’t do that, explains attorney Roy Oppenheim, whose firm, Oppenheim Law, has been operating from Weston, Florida since 1989 and specializes in real estate law and foreclosure. “Tenants think, ‘How can someone in foreclosure collect rent?’” Oppenheim said. “But it isn’t true; they can collect rent.”

Legally, tenants are still on the hook for the monthly payments outlined in their lease whether they’re paying the bank or a new landlord. If they haven’t held up their end of the agreement, a switch in homeownership through foreclosure doesn’t protect them from eviction. In fact, it speeds up the eviction process.

“The new owner will be very aggressive with the tenant,” Oppenheim said.

If the tenants have been paying rent, landlords can still decide to have them removed—usually with relative ease. That’s because in order to clear the property of any possible claims, lenders filing a foreclosure will list tenants as defendants.

“Even if tenants have been paying rent, they can still be evicted if they were named in the foreclosure,” Oppenheim said. “The landlord has all the options: They can [start] a new lease, or they can start the eviction process.”

The state of Florida offers a fast-track foreclosure process for residential properties, which allows the process to take place as soon as 20 days rather than drag on for a year or two. The summary proceeding for this process is done in county court, Oppenheim said.

“It’s done very fast and done to benefit the landlord,” he explained.

However, the foreclosure process—and a landlord’s subsequent options for dealing with an existing tenant—is largely dictated by state law. In Texas, foreclosures happen in a three-step process that will end with the property being auctioned off at the county courthouse on the first Tuesday of every month.

Giving Eviction Notice to Tenants

All states abide by the federal Protecting Tenants at Foreclosure Act, which requires the new owner to give tenants 90 days of notice before evicting them. The act also states that if the tenant has been paying rent and has a “bona fide” lease, the length of the lease must be honored by the new owners, the Austin Tenants Council explains.

Tenants are considered bona fide and protected under the act if they aren’t the children, spouse or parent of the former owners; if the lease is a written or spoken contract that’s not a special deal between friends or family; and if the rental amount isn’t substantially lower than the market rental value. Bona fide leases may be subject to the original lease term or they could be month-to-month.

Tenants who have Section 8 Housing Choice vouchers enjoy additional protections under the act. In fact, landlords are required to take over those leases in their entirety.

The only time new owners can evict a rent-paying tenant sooner than 90 days is when they intend to live on the property—an exception that does not help landlords hoping to rent the property out.

New landlords should let tenants know, in writing, where to send their rental payments while the 90-day period is in place or if the landlord decides to take over the previous lease. The renter is legally obligated to continue to send payments to the previous owner or management company until they receive written notice from their new landlord.

Keeping the Existing Tenant

Landlords shouldn’t assume that existing tenants acting in good faith of their lease are liabilities, but rather assess them through the same lens that they evaluate new renters for any other property. And tenants who have been paying rent, despite knowledge of the foreclosure proceedings, may be an attractive choice.

First, they have proven to be reliable and trustworthy, despite tumultuous circumstances that made their future living situation uncertain.

Second, tenants who continued to pay rent have proven that they are committed to the property and don’t want to leave their home. That level of commitment could guarantee a longer-term income should the landlord decide to keep the tenant on.

The new landlord may ask the tenants to sign a new lease if they would like to change the rental agreement. If the lease under the previous owner is still in place, however, the tenants are entitled to those terms for at least the 90 days outlined in the Protecting Tenants at Foreclosure Act.

If tenants don’t want to agree to the new lease, they may give immediate notice of their intention to move out.

Obligations for Repairs

Investors often purchase foreclosed properties at a lower cost with the intention of investing in repairs and renovations before they are fully profitable. That process can be trickier if the landlord decides to keep an existing tenant in place. No matter what condition they obtained the property, however, landlords are still required to ensure the home is habitable. Landlords should be prepared to assess the structure, plumbing and heating of the new property, as well as whether any pests are making the property unlivable.

If a previously bank-owned property stalled in a foreclosure process, there’s a good chance the property needs substantial repair. Banks will usually hire a management company to maintain the property but often aren’t designed to act as landlords. Additionally, any repairs outlined in a previous lease that the tenant may still be operating under are now the responsibility of the new landlord.

More Foreclosures Imminent

During the 2020 pandemic, government and private relief programs allowed homeowners who were struggling to pay their mortgage to delay their payments for as long as 18 months. Those programs meant that foreclosures across the country were at their lowest level since at least 2005, the year ATTOM began tracking foreclosure dates.

In 2022, with COVID-19 cases dwindling down, President Biden is still encouraging struggling property owners to look into the American Rescue Plan, which includes the Homeowner Assistance Fund (HAF). At the time of this writing, HAF has provided close to $10 billion in financial support to help families remain in their homes.

Still, foreclosures continue to happen. Florida (4,707) and Texas (4,649) are in the top five for the first quarter of 2022.

“Foreclosures are proceeding,” Oppenheim said. “Clients who have been in their homes for years are finally being asked to vacate. The judicial process has come to a conclusion. Courts are asking them to leave their homes now. If they don’t, they will be kicked out by the police.”

Oppenheim said he doesn’t see the potential wave of foreclosures reaching the tsunami level that happened in the fallout of the Great Recession.

“In the last crisis, we had literally thousands of foreclosures that our firm handled,” he said. “We’re hoping it won’t happen again.”

For potential homeowners who are ready and willing to be landlords on foreclosed property, knowing the status of current tenants, seeking legal representation to understand all rental and eviction options, and fully grasping what they’re getting into pre-purchase are all highly recommended.

Just as the new homeowner will have questions, so will the renter who is caught in the middle. Whether keeping or removing the tenant, making that final determination in a civil and honest way should help considerably.

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