What happens to tenants when their landlord fails to make the mortage payment? One of my clients is learning the answer to this question the hard way. He's living through it.
Let's back up two years to March 2006, when I rented a nice 4-bedroom colonial in Bowie, Maryland, to Tom and his family. After two years in a townhome, this family of five was no less excited about their new home than any homebuyer. This wonderful home gave them a yard, a home office, a playroom, and an updated kitchen. The commute to work was shorter, the schools were good, and they could enjoy the security of a long-term lease. It was a home they imagined living in forever.
Forever was their dream. Former home-owners themselves, they couldn't buy now without first resolving some issues of their own. The landlord assured these tenants they would have the opportunity to buy this home any time they were ready. There was no reason to doubt that - after all, this was a professional landlord who owned several rental properties. My clients signed a two-year lease, with reassurances they could extend if they were unable to buy the home within two years.
Tom and his family were ideal tenants, always making their rent payments on time and making minor repairs and improvements at their own expense (with landlord permission), such as upgrading light fixtures, thermostat and window blinds. They always treated the property as their own, feeling confident it would be theirs someday. Like homeowners, these tenants went through all the normal ups and downs of life (plus a few extras) here in their beloved home. The landlord and property manager seemed to like them - why not, since they were ideal tenants.
Two months ago, Tom accidentally opened a piece of mail addressed to the landlord - a moment that turned life upside down for him and his family. It was a letter from the bank informing the landlord that the property, Tom's home, was going to foreclosure. He called me for advice and we agreed that he should contact the landlord directly - after all, there was a possibility the property manager had pocketed the rent instead of making payments to the bank. To make a long story short, that was not the case.
It turns out the landlord's many rental properties were purchased or re-financed during the so-called "good years" with minimum down, using combination first and second trust investor loans. All these loans were ARMS, all the property values had gone down so the properties could not be re-financed, and this property owner was in over his head. Tom's "great" landlord was going to lose everything personally, and tenants in all of his rental properties were faced with the unimaginable - losing their homes to foreclosure.
Make no mistake, tenants are real people, and the lives of many families would be turned upside down through no fault of their own. They are in the unenviable position "between a rock and a hard place" - with a lease in place that requires them to stay and continue making payments to the landlord; unable to move to another property without losing their substantial security deposits. They are faced with having to find another home, moving expenses, changing schools, and the time investment any relocation requires. I can only assume each tenants has endured the stress and hardship that my client and his family have for the past two months. My heart just aches for them!
Fast-forward to this week, when my client's home went to auction. Niether the landlord nor property manager ever notified him about this, but he did receive a letter from the trustees about a week ago. Tom took off work to attend, hoping an investor would purchase the property and he could simply have a new landlord. This wasn't the case, after all - the first trust lender placed winning bid, the only bid. The house was SOLD! ... Now what?
Investors who were in attendance at the auction told him to "squat" on the property - that he could probably have two or three months there rent-free, until an agent of the bank (probably a real estate agent) shows up at his door and offers "cash for keys", on behalf of the bank What an unfortunate mess, since there's a good chance an investor will eventually buy this property from the bank and put a "for rent" sign in the yard. By then, Tom and his family will be living in another home.
There are no adequate words of consolation for my clients, and I feel badly for all tenants faced with a scenario like this; and, yes, even the landlords who are experiencing the negative results of loose lending practices in recent years.
Note: These are not photos of the actual house or tenant, and I couldn't bring myself to post even a stock photo of a family. But make no mistake, entire families face this consequence of the ongoing mortgage foreclosure crisis - even if they are great tenants who always pay on time. Maybe this story will have a happy ending for my clients, after these weeks and months of heartache. I'll post an update when they get settled into their next home.
Now, I just have to find them another place to live in the same school district!
RELATED LINK:
- Foreclosures hurt renters, too
- Renters Can't Escape Housing Foreclosure Crisis
- A Happy Beginning - At Last!
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I've been through this process twice with families. One military family in Burke in a new single family home and another family in a condo in Woodbridge. We quickly figured out that the security deposits were a goner and that if landlord couldn't make their mortgage payments there was no way they would ever see it back. One of the settlement attorneys I use frequently told them to send a certified letter to the landlord telling them they were leaving and why. Then they packed up and moved on. Better than waiting for the other shoe to drop.
Margaret The fallout from this debacle goes on and on and grows relentlessly hurting people with no invlovement - I just hope our government doesn't bail these lenders out as they did with the S&L crisis in the 90's. That would only make the overall cost even worse and give the lenders an opportunity to profit in the long run, Karen
Margaret - As you stated, this is a prime example of the fallout from lax lending practices over the past few years. I hope and pray that your clients will find a suitable solution without any additional headaches. I am going to feature this post in Family Ties, and I am also going to flag it for an AR feature. This one needs more exposure, in my opinion.
For some reason, this computer won't let me feature it in the group, so I will try to remember to do it later today. I did flag it, though.
Margaret,
Wow. What a tricky situation. I'll be staying tuned to see how things work out.
All the best,
Audrey
I just heard back from our local Association legislative liaison, and he tells me there are no bills before this session of the Maryland legislature for protecting tenants in foreclosure - such as making it so the lease is not voided by foreclosure. He indicated that we can propose next year that leases survive foreclosure, so tenants have some peace of mind.
Hi Margaret,
There are so many facets to this mortgage mess and this is one that many have not heard or thought about. These poor tenants, what a terrible position this has put them in through no fault of their own.
How sad for the tenants. Such a shame. This story just helps solidify my disgust at the motgage industry for "fudging figures" "making it happen" and all the other terms they used to make illegal loans. Folks that shouldn't have gotten loans got them, and all the ARM's that were made for folks with incomes that wouldn't sustain the final rates, just really gets me. Hopefully, new guidelines will come from this and this type of lending will stop. The innocents are now suffering from all this fancy financing that went on. I do hope things work out well for your people Margaret.
Hello Margaret,
This is a sad situation for both the tenants and the landlord, that is becoming a far too common!
Hello Margaret,
This is a sad situation for both the tenants and the landlord, that is becoming a far too common!
Margaret - this is an unfortunate situation for the tenants. I agree with you 100% that they are victims in this situation and their lives are ultimately affected. So many people have been impacted by this fallout.
Margaret, this is such a sad story! Wouldn't it be great if they could buy the place from fhe bank?
Margaret~This is so incredibly heartbreaking. I'm so very sorry for your clients for going through such a trying time. I can only imagine based on the statistics how many people are being faced with these same decisions in life. Thankfully your clients have you on their side and I'm sure you will make the transition for them as good as it can possibly be in these circumstances.
Great warning to tenants out there. It is so common in Arizona to see out of state investors just pocketing the rent on the property until it goes to trustee's sale. I warn renters to look out for the tell tell sign of a rent check cashed LATER than normal. By then, the owner is so far behind that there's no rush to get the check to the bank. We have picked up two potential buyers that rolled the rental dice again instead.
Margaret, you're right this is just awful for a family to endure and I had a family experience such a scenario several months back. However, this family never received any knock on the door advising them of having a few months to move after the auction. Then one day when they opened their front door to an eviction notice posted on their front door to tell them they had 24 hrs to vacate. One can't even imagine what they must have been going through. Luckily, they went to the courthouse that same day to receive an extension of two weeks. So, they had to pack, find a new home and be out in two weeks...and this was a week before Christmas. So to say the least, their lives were turned upside down. It was appalling
I have a friend going through a similar situation. In their case their deposit is probably lost also. What a bad situation they have been paying the rent and the owner was not paying the mortgage.
Margaret, just went to court the other day for a client (the lessor) to evict a tenant that paid only $600 in rent for the past 5 months (monthly rent was $2300). The judge gave them 10 days to find a new place plus they now have a $8,000 judgement against them. I get the listing back but the home is going to be in shambles most likely. No one wins.
Oh what a tangled web they weave. I'm a property manager in SW Florida and about 30% of my daily calls are from renters facing the same tune. Owners have somehow collectively come to the conclusion that this is the only way for them to receive any type of compensation for losing their shirts. Not only is this a repeated epidemic but these owners are dropping the price for their rentals so low that its squeezing out the Duplex and Condo homes out of the market. Some single family homes are renting for $800 per month with the owner knowing his home is doomed and not telling the property manager or the renters.
Real good renters are jumping at these low offers only to receive an eviction notice in the mail from the bank stating they have 30 days to vacate. There is no policing this pattern and many good rents are left scrambling with their families to find a solid place to live.
Maria - Thanks for your input - Yes, this is a terrible time for tenants all over the country. I probably hear from one a week who has read this post and has experienced something similar.