Renters: How to protect yourself if your landlord faces foreclosure
Federal law provides some protection against eviction, but check if the mortgage is being paid
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Dear New Frugal You,
A friend of mine just got booted out of his home. He was renting a house. One day a bank notified him that the house was in foreclosure and he had to move. He's worried about getting his deposit back. I'm about to look for a rental. How can I make sure that doesn't happen to me? -- Wary Renter
Dear Wary Renter,
A record 2.9 million properties in the United States received foreclosure notices during 2010, according to RealtyTrac.com, a foreclosure property marketplace. And, it is estimated that 25 percent to 30 percent of foreclosed properties are occupied by renters, so you are wise to wonder if you're about to put first/last/security dollars into a troubled property.
Before we see what you can do to protect yourself, let's learn about what happens when a lender forecloses on a rental property.
A rental is just like any other property. When the borrower falls behind, the lender can foreclose. Once lenders foreclose, their goal is to sell the property and recover as much of their loan as they can.
Historically, lenders felt that it was easier to sell a property when it was vacant, so they often terminated leases and forced renters to leave immediately.
In May 2009, the federal Protecting Tenants at Foreclosure Act became law. It requires lenders to honor existing leases so renters can finish out their leases before being told to move. Those renting month-to-month got a minimum of 90 days. Intended to assist renters during the aftermath of the housing crisis, it's a temporary law whose protections expire Dec. 31, 2012.
The housing crisis brought about another change that may ease your mind a bit: Many lenders realized that it was bad business to force out paying renters. They lost the rental income, plus rental property is often easier to sell with existing leases.
Knowing all that, what can you do to protect yourself? How do you avoid a landlord who is already in or about to get into financial trouble? Even if you don't get kicked out, life is easier without the hassle of a foreclosure.
The first thing that you can do is to see if a potential home is already in foreclosure. Access to records varies greatly, but some government agencies' websites -- usually at the county level -- list property owners and any foreclosure proceeding against them. Check the address that you may be renting. Find out where in your area the "notice of trustee sale" public notices are posted, either in a legal newspaper or online. Your area may also give access, via the Web or mail, to "notices of default" or "notices of sale" filed by the lender with your county recorder.
There also is a multitude of private foreclosure listing services that do this legwork for you, but virtually all of them require you to pay to see the addresses of the homes in foreclosure.
Also, use any available info to check out the landlord. See if they have other properties that are being foreclosed. If so, you probably want to avoid any of their rentals. Many landlords have borrowed heavily against their rentals, and a problem in one often spreads to their other properties.
Beware of landlords who seem too anxious to get you to move in. They may be using your first/last/deposit to try to keep up with their mortgage payments. Reputable landlords will want you to supply credit report information and personal references. Be wary of those who do not.
Ultimately, beyond paying your rent on time, there's nothing you can do to prevent a landlord from falling behind on the mortgage. But even if that happens, there are still a few things that you can do to make the situation easier on yourself.
When you receive a notice that your rental is being foreclosed, contact the local government housing agency. They can tell you which local, state and federal laws apply to your situation. They should also be able to help you determine who gets your rent checks and who to call when the plumbing needs repair.
If you lose a deposit or already paid rent, you should be able to sue your former landlord, but you should recognize that you may be throwing good money after bad. Remember, all this started because the landlord was in financial trouble. You can't squeeze blood out of a turnip, which is the reason any court-ordered judgments go uncollected -- there's no money to pay them.
I have two other cautions for you. The most dangerous time for a renter is when the landlord expects to be foreclosed on or when foreclosure has started. Unscrupulous landlords have been known to collect rents and deposits without making any attempt to pay their mortgage -- or make repairs. They'll pocket as much cash as possible from the property and let it fall into shambles before walking away.
Finally, under normal circumstances there's nothing wrong with sending your rent in early. But, if you have any suspicions about your landlord, this might be a good time to pay your rent on time, but not early.
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