With every rental comes the risk of foreclosure. Here’s what both renters and owners should know about their rental property.
Buying an investment property and finding the right people to rent can be an incredibly validating and fruitful experience. For those who are self-employed or have never spent time working for big businesses, purchasing property and renting it out is a veritable source of income in lieu of retirement.
However, before making the leap and getting into the rental market, it is important to consider the rise and fall of real estate values and potential dangers. If real estate values fall, you could be put in a position where you have to put your own money into mortgage payments if you don’t make enough from rent. If you are fiscally unable to do so, this puts you at risk for foreclosure.
For some, a potential solution in the above situation is reaching out to the lender in hopes of getting a loan modification. With a lower interest rate, it becomes possible for the Landlord to actually make a profit in a bad market. However, often times owners are told by the lender that unless they are late on their payments, no modification is possible. More often than not, the next step is foreclosure, no matter how insistent you are in trying to convince the lender to modify your loans. This is especially true in the case of investment properties -- with primary residences, there is generally more sympathy.
The question becomes what happens to the tenants of the home if their renter cannot keep up with their mortgage payments? Prior to 2009, it was the case that in a foreclosure, the tenants were essentially thrown into the streets, sometimes not even knowing that their landlord had been late on their mortgage payments. The introduction of the Tenant Protection Act changed this legal issue, and now if a lender forecloses on a property, he or she has to honor the terms of prior contracts so that their tenants can stay there until the end of the lease.
Landlords do not always disclose whether or not their property is in danger of foreclosing to potential tenants. For that reason, if you are looking to rent out a property, there are a number of steps you should take to ensure that you are fully aware of the terms of your lease. For starters, renters should always examine the actual unit they intend to rent to ensure there is nothing amiss. Pictures should be taken and appliances examined for any prior issues prior to the start of the lease. Similarly, the security deposit should be completely understood, particularly under what circumstances you as the renter could lose it. A point of contention for renters is often the right of the landlord to inspect their property once occupied, so renters should take care to read the lease closely in order to understand these exceptions.
On the other hand, in the case of foreclosures, the renter is not always at fault. In the case of a zombie foreclosure, the property is vacated by the homeowner thinking the foreclosure would happen in a timely manner but it never does. If you, as a renter, ever face this situation, make sure to immediately contact the servicer of the loan about the zombie foreclosure. If you get no response, contact the Consumer Financial Protection Bureau and file a complaint. Worst case scenario, if the lenders are still unresponsive, then hire a competent real estate lawyer.
