Thursday, May 07, 2009

Rental Scam Alert: Foreclosure For Rent Edition

Hat tip to Wadin' In on this one. Here's a lovely house available for rent in Lincoln, CA:


Unfortunately for the unsuspecting renter, the house received a Notice of Default on March 23, 2009:


Now it is possible that the owners have brought the mortgage current since then, but is it worth the risk? If you're looking for places to rent, please use all appropriate due-diligence first. PeonInChief's "Tenants and Foreclosure" blog is a great place to start.

29 comments :

Anonymous said...

That doesn't make it a scam or illegal until its foreclosed upon.

Many short sales have NODs on them.


Sippn

Anonymous said...

Now that you're in bed with Foreclosure Radar.....

:)

will you be able to continue with unbiased comments?

Sippn

Max said...

Well, "in bed" implies intimacy... :) No bias here, my friend.

Husmanen said...

I helped some friends evaluate potential rentals in EDH, Folsom and Gold River about a month ago.

Out of the short list of maybe five (5) I believe three (3) of them either had a NOT filed (checked realtytrac w/o subscription), late on property taxes or were purchased in recent bubble years (2003-2005 span).

Also, through an source of mine I could check the total outstanding loans, which will tell you if they are underwater or not. Very useful.

On the flip side, my neighbor rents from an owner that quit paying the mortgage (1 year), then the house went to auction my neighbors quit paying the owner.

Of course the bank postponed the auction, but my neighbor does not know this officially and has quit paying rent ... no one to send it to. This happened three (3) months ago.

Once the bank finally takes it over they have 60 days to exit after notice from the bank, a minimum of 5 months free at this point. That adds a lot to their future down payment.

PeonInChief said...

No sensible tenant rents a property with a NOD, unless she really likes moving. These days, a NOD isn't filed until the landlord is several months behind on the mortgage, so the landlord has probably pretty much given up on the property by the time the NOD is filed.

What's usually happened is that the previous tenants discovered that the landlord was defaulting, and decided to move. The landlord, wanting to milk as much money as possible from the property, re-rents to unsuspecting tenants. Landlords in this situation frequently rent to tenants who have credit problems, charging them large deposits for the risk.

Charming.

Rich said...

A rental agreement is a contract.

Taking someone's money knowing you will not be able to provide the contractual service (a house to live in) is against the law.

If they intend to pay the mortgage with that rent money, ok. But who actually thinks they aren't just trying to grab an extra 9K along with their cash for keys?

Clue: how many houses like this do you see for rent have no pet restrictions?

patient renter said...

"Clue: how many houses like this do you see for rent have no pet restrictions?"

Ahhh, very astute :)

Deflationary Jane said...

hmmm I didn't have to pay a pet deposit but the owners were very very specific about what pets they would accept.

Wadin' In said...

Maybe the owners brought the property current.....

Is that likely?

$850,000 loan ($400,000 over value)
PITI + HOA = Approx. $6200/mon

BTW, similar houses rent for $2500/mon in that market. They want $4500???

The makings of a fleecing are in the works.

Ryan said...

I think you might have just done more proactive detective work than the entire Sac County Detective force combined.

Max said...

I think you might have just done more proactive detective work than the entire Sac County Detective force combined.There has to be a way to automate this somehow, kind of like a Car Fax for renters. The property management companies are used to being aggressive with prospective tenants, but they seldom perform the same background checks on their clients.

PeonInChief said...

Tenants should demand two provisions in their rental agreements or leases. The first, for fixed-term leases, is a provision that states that the filing of a notice of default by ANY lender constitutes a breach of the lease. This enables a tenant who has an unexpired lease to move at her convenience, not that of the landlord.

The second provision is one, for all leases and rental agreements, that allows a tenant, once a notice of default has been filed, to recover ALL of her security deposit by withholding rent. This would mean that tenants would recover their security deposits even if they'd paid more than one month's rent (for pets or lack of creditworthiness or whatever).

While some property management firms are quite decent and a few have returned security deposits to tenants prior to the foreclosure sale, others are quite the pigs. One tenant, because she was young and had limited credit, paid two months rent as a security deposit. The landlord went into default the next month and the property manager told her that, if the landlord asked for the security deposit, it would be given to him.

patient renter said...

Peon - The problem is, for better or worse, the rental that someone wants might just happen to be controlled by a property management company, and they're not likely to allow additional provisions in their standard lease agreement.

But as to the story you mentioned, I would think that the girl could easily recover her deposit if she went through small claims court, but it is a hassle.

Bryan said...

Given the fraudulent character of allowing a tenant to live in a property that's being foreclosed on (and more over the basic damages due to a lease being broken--if you're getting kicked out), I'd say "withholding back" your deposit is reasonable self-help, whether or not its in the lease. It kind of makes me laugh to think of what argument the landlord would have to make to the judge to show how their damages exceed those due the tenant on the broken lease and the intentional misrep fraud claim (and there's inducement and some others you could probably throw out there).

PeonInChief said...

The problem with that, Bryan, is that a landlord can file an unlawful detainer against a tenant who hasn't paid rent. The landlord owns the property until the trustee sale. Tenants who have unlawful detainers filed against them get reported to the eviction registries and have immense difficulty finding replacement housing, so withholding rent in that situation isn't usually a good idea.

And PR, it's not going to happen until tenants start demanding these provisions, and walking away from landlords and property managers who won't allow them. And one might ask whether a landlord or property manager who wouldn't allow such provisions was on the up-and-up, as these provisions would have no effect on a landlord who didn't default on his mortgage.

PeonInChief said...

And PR, I do tell people to sue the (former) landlord in Small Claims Court, but the point needs to be made that it's not the landlord's money in the first place. It's a refundable deposit which, in most accounting systems (those other than Enron, Citigroup etc.), is an asset of the tenant and a liability of the landlord. A provision like mine, or the right of a tenant to place a lien on the property for the amount of the deposit, just makes it easier for the tenant to get the money back.

Getting a judgment against the landlord, after all, is not nearly so satisfying as having the money in hand.

Max said...

it's not going to happen until tenants start demanding these provisionsI've seem both sides of the landlord-renter tug-o-war, and it can truly be a test of human civility. IMO, tenants will have zero luck with this, since it makes them appear litigious.

I completely understand why landlords use aggressive leases and put prospective tenants through the ringer, but they tend to scare off decent potential tenants by acting like hardasses upfront. I personally would never rent through a property management company, yet I would never lease a property without one.

patient renter said...

And one might ask whether a landlord or property manager who wouldn't allow such provisions was on the up-and-up, as these provisions would have no effect on a landlord who didn't default on his mortgage.That's a good point and a very valid one to raise with a property management company. But I think Max is right, whether or not a property management company is on the up and up, I think they'd be more inclined to take a pass on potential renters who make such requests, so long as there are other potential renters to choose from. It sucks, but that's how I'd imagine it goes.

If I ever have to deal with another lease through a property management company though, I'll certainly be discussing something along the lines of what you've laid out.

Husmanen said...

Timely subject. I had a note taped on the door of my rental today which stated that the owner had 'missed' a payment.

This is not a NOD, we have to go a few more months or this one, but it is good info. That coupled with not paying prop. taxes in Dec 2008 and Apr 2009 means the NOD is on track.

If this goes to NOD I will milk it and go with this technic:

http://piggington.com/ot_when_your_landlord_defaults Could end up like my neighbors with six months rent free.

patient renter said...

Love to hear Peon weigh in on that piggington post.

PeonInChief said...

Peon will weigh in on the Piggginton post on Sunday. She is attending a birthday party tomorrow and then is being taken to dinner for her 28th wedding anniversary Saturday night.

PeonInChief said...

PR--I've discussed this issue raised on Piggington on my blog. Tenants should certainly avoid paying rent to landlords going into foreclosure, but the landlord can demand rent up to the foreclosure sale. (Landlords may not, however, collect rent after the foreclosure sale. Some landlords have done this.) If it appears that the landlord has abandoned the property (no longer returns phone calls etc.), tenants can stop paying the rent and see what happens.

If the tenant can stop paying rent, the tenant will have at least six months from the filing of the NOD to the expiration of the 60-days' notice period after foreclosure.

Now, what tenants cannot do is stop paying rent, ignore the 3-days' notice and assume that they can explain to the judge that the landlord is going into foreclosure and therefore shouldn't be allowed to evict the non-paying tenant. Because, aside from the fact that most judges in Sacramento County are just awful when dealing with the issues of the not rich and connected (I've only seen it on jury duty, mercifully, and never had to sit through an entire trial), the law isn't on the tenant's side here. And while I love the IDEA that judges would be incensed that a landlord was trying to collect rent from a tenant while not paying his mortgage, judges are more likely to be landlords than tenants and to have greater sympathy for their fellow landlords.

Husmanen said...

PeonInChief... Thanks, my plan is to continue to pay rent until the Auction Date. As you mentioned my contract is with the landlord until they are not the landlord anymore.

Since I have not received an NOD or one has not been recorded on my property. By my best guestimate the owner could receive an NOD in June. Which would put me in the position of not having to move until December earliest.

A lot can happen between now and December 2009, one thing is the postponement of the auction date or we find a dream home that is close to rental parity. The latter has not occurred yet.

More to come...

PeonInChief said...

Husmanen--

In general lenders don't file a NOD until the owner has missed three payments. In addition, if the lender doesn't know that the property is occupied by tenants, the various moratoriums come into play and it could be months before the NOD is filed.

Husmanen said...

Thanks PeonInChief... Is it an advantage to be a renter in a home that the banks think is owner occupied?

Do the moratoriums treat the 'house/loan' differently if it is owner occupied or by a renter?

Thanks!

Also, posted on your blog site Tenants and Foreclosure too.

BTW, everyone there is a wealth of info. for renters whose homes may/are going to be in the REO process.

PeonInChief said...

Husmanen--

That's a good question, and of general interest too! In most cases, until the Notice of Trustee Sale is posted, you're better off if the lender thinks the owner lives at the property. That's because the various moratoriums apply only to owner-occupied properties. So if the lender thinks the landlord lives there, it takes more time for the lender to move to the auction.

BUT, once the Notice of Trustee Sale has been posted, you want the lender to know that you are a tenant residing at the property. First, tenants receive 60-days' notice after the foreclosure sale, while owners can be evicted on a 3-days' notice. And if you live in a community with rent control/just cause eviction protections, you want to make sure that they know a tenant resides at the property. Notifying the lender of your status will make it less likely that the lender will try to "evict" the landlord, sidestepping the laws protecting tenants in foreclosed properties.

Also posted on my blog.

Husmanen said...

PeonInChief... thanks, great info and great site, much appreciated.

Mr. Im glad Im not in SoCal anymore said...

Would that not be 'anticipatory breach of contract' by the landlord if he/she stops paying house payments and as such the original rental agreement is void?
landlord stops paying, subsequently no longer provides safe and secure habitation for the tenant, whether they own the property or not (owned by bank etc) then surely the contract is void and the tenant cannot be evicted for non payment. I say prove you own the house and all is paid up then rewrite a new contract. (not that they will but buys more time)?

PeonInChief said...

To I'm Glad...

Oh, would that that were true. But it isn't. Your landlord hasn't breached the contract until the house is taken back by the lender. And no tenant can afford to be sued for nonpayment of rent by the landlord, as many landlords check the unlawful detainer registries and would refuse to rent to tenants who have had unlawful detainers filed against them.