Your Short Sale Listing Client Has a Tenant - What do you need to know?

I have two Santa Cruz County short sale clients who havr a tenant in the property. One Santa Ccuz short sale client is facing the short sale and foreclosure because they had deadbeat none-paying tenant which poisoned their ability to pay. The other is simply stuck with accepting market rents that are well below their mortgage amount. As soon as they hit any personal hardship, they can no longer pay the difference and end up facing foreclosure or simply needing to unload the property to prevent financial ruin.

So, what does the seller do about the tenant? Should the seller accept rents from the tenant if they are not paying their mortgage? Did you know, there is a federal law that protects tenants?

If the tenant is paying the lease/rent on time and the seller is not paying the mortgage, then the seller may be committing what the lender could deem as fraud. Banks show extreme disfavor to borrowers asking to do a short sale when their financials clearly show acceptance of rent. A seller accepting rents should be wholly prepared to provide proof of financial hardship and that the costs of the property out-weigh the rents received. When a seller asks you if they should collect rents when not paying the mortgage tell them to seek legal counsel and get it in writing.

If tenants are in breach of the lease and are not caring for the property or are uncooperative when it comes to marketing the property, the seller might want to consider eviction. However, if the tenants are paying and are not in breach, the seller needs to keep in mind that the tenant will likely remain due their security deposit regardless of the short sale outcome.

If a seller is in breach of the lease (i.e. in default), but are taking good care of the property and actually improve the marketability, the seller may wish to allow them to remain. In this scenario the seller may still be responsible to pay the security deposit.

If you are working with a client who has tenants in a property that is facing a foreclosure date/trustee sale, be certain the tenants have been told in writing. Everyone involved need to recognize that the short sale process is not a guarantee that foreclosure will be stopped.

Effective May 20, 2009 until 2014, the Protecting Tenants at Foreclosure Act (PTFA) is keeping tenants from being forced to vacate 30-60 days after a foreclosure date.

The new law provides tenants the right to stay in the property for the term of the lease if taken back by the bank at auction. If the property is purchased by someone who intends to occupy the property, then the tenant gets 90 days.

If you are thinking about a short sale call someone who knw how to keep you from getting into trouble. A short sale is too complicted to have someone who can't prove they have done 20 or more.