Hey guys,

If this is better asked in the REO forum, let me know, but since it's a pre-foreclosure question, I figured I'd start here.

I was asked the other day if there's anything illegal about procuring a renter and accepting rent for a property that is headed for foreclosure, but not there yet. In other words, let's say I own a home that I stopped paying on, but I know that the foreclosure process will take several months or more. Is there anything fraudulent or illegal about renting it out in the interim (with full disclosure to the renter)?

I can't imagine that there would be anything illegal about doing this. It is technically still the homeowner's property. They should be able to do whatever they want with it. I think it would be looked at the same as if the homeowner already had a tenant in the property and coudn't pay the mortgage any longer after the tenant has already been living there. I think as long as it were disclosed to the tenant, they shouldn't have a problem with it.

(This is not legal advice, just my own opinion.)

No. Our daughters next door neighbor in Vista Ridge (Erie), stopped making payments to buy another, cheaper house, rented it out for over a year and the renter just moved out last week when the bank took it over.
It was the second house in a row the renter had to vacate because it was being foreclosed on. This time the renter decided to buy their next house.
Both times the renter did not know about the foreclosures, but the owners were not REALTORS either.

There could be issues depending on the landlord laws, especially pertaining to the security deposit held (if there is one). It depends on how the lease is stated though.

I was reading about a case where the landlord knew he was due to be forclosed on charged high decurity deposits, low rents, and kept the money. The bank is claiming he tied up the properties with leases and they have to spend monies now to evict these people (who had no idea)and costing them money. They are asking the state to pursue criminal fraud charges. The landlord misrepresented himself for financial gain. Don't know what state the action is taking place though.

An agressive DA or AG and a Grand Jury and a sypathetic judge, who knows!

Each case in my view would have to be looked at as "intent to defraud" and does the wronged party want to pursue time and legal expenses to recover a small some. For most the answer will be NO.

The right thing to do would be to disclose this to the renter.

I have a renter now that rents a normally 2,500 a month upscale townhouse for 1,200 a month because the owner is months behind on the mortgage and just wants the bank off of their backs.If it forecloses the renter is fine with leaving.

I believe in courts investors who own properties are more frowned upon doing those tactics and can be pursued on occasion.

I agree, Disclosure by the (soon to be) former owner lets the tenant make an informed decision.

I was getting out of my car across from our office one day a few months ago and a deputy was posting a foreclosure sale notice on a property up the street. The next day the notice was gone. The next week the tenants are moving out. The next week new tenants moving in.

Since it was a FRBO (or a FLBO), I have no way of knowing the disclosure situation, but my guess is it was not disclosed. Four young guys live there now, so perhaps they don't care.

My mom is actually in this situtation right now. She has been renting from a friend for the last year. Her friend apparently stopped making the payments on the townhome due to another property where the tenants weren't paying and she had to evict them, so she basically took the money my Mom paid and used it to make payments on the other property and now both properties are going into foreclosure.
My Mom received a letter from the bank yesterday addressed to Occupant and advised her when the auction would be and they would consider letting her keep her lease. She had no idea the owner was behind on payments. The owner does have the townhome listed with another firm above FMV and the owner has quite a bit of equity. Not sure why they aren't going the short sale route or listing low to get it sold and just walk away. Since it is listed I don't have the right to contact the owner so I have advised my Mom to mention a few options to her.
In my opinion I think the banks should start filing charges on these landlords.

The banks could care less about the landlords and the tenant relationship that exists. They aren't going to throw money around to go after landlords that have wronged tenants.

Here are the key phrases "now both properties are going into foreclosure" How do you know this? Okay so your mom recieved the letter. Have you checked the local county paper in the legal section yet? In GA they have to advertise 4 weeks in the paper to be able to sell the first Tuesday of the next month at the courthouse steps. So if the letter came in the middlle of June it won't be at the earliest until the first week of August before it forecloses.

Your mom's friend could file bankruptcy or do a loan mod workout and put back payments owed to the end fo the mortgage and adjust the monthly downward. They are less willing to work on the loan mod when the find out the homeowner is renting it out.

"consider letting her keep her lease" consider is the key word here. If the lease is not at market rent they may not want to do it. Even after it forecloses your mom will have time to negotiate cash for keys. Never take the first offer as it is low. You come out ahead if they won't up it just letting them evict as you get 1 to 2 months free rent that way at least.

The foreclosure sale can be postponed right up to the day of the sale at the steps with a BK filing in GA. It's impossible to know your mom's friend's state of mind. Maybe there is not the equity you think there is. With a devalued market and back payments penalties and interest there could be nothing left.

I did check the public notice site and I dont see it on there yet. The letter from the bank stated it would go to auction in August.
She is paying market rent which is $900 mo for the townhome in the area she is located in.
As far as how I know both properties now are going to f/c is after my mom received the letter from the bank she called the landlord and found out. My mom has known this lady for 10-12 years so she was taken off guard by getting the letter and never thought something like this would happen.
Anyway, I mentioned the same options as you listed above and I cant approach the landlord because it is listed so I told my mom to mention to her. I also mentioned to my mom what would happen on her end in the event it does go to auction so she knows what to expect as a tenant.

Thanks so much for your thoughts - you pretty much confirmed what I thought - that as long as the homeowner still owns the house, even if he's not paying for it, he can do with it what he wishes (live there, rent it out, whatever). I just wondered if I was missing something.

A friend of mine went thru a bankruptcy last year, which coincided with the pending foreclosure of her home. She wanted to rent out the house during the long process and was told she couldn't, but I think that had to do with the bankruptcy, not the foreclosure. Does that sound right?

Obviously, the tenant would need to be aware of the true situation and realize that his or her "lease" would be uncertain. The laws surrounding that part of the deal would probably be state-specific.

Thanks, all!

As far as short sales some banks won't do them if the homeowner no longer occupies the residence. Homeowners never tell banks they move out because the banks can call the note do and or also require them to get landlord's insurance etc.

Also on some of the old closings from a few years ago the occupy residence clause wouldn't be in there. Today it's in almost all closings. The reason is lenders have statistical models that say if a property is for investment the probability for default is higher. This is why lenders consider it mortgage fraud when a person says they are going to live there and then just rent it out to get a lower mortgage interest rate. HUD especially has really started going after these people.

Lenders know in hard times most all will FIGHT to stay in a property they live in. Given the choice land,rentals,commercial buildings they will let go much easier.

Everyone has to have a place to live as it's a neccessity of humanity. I would make sure your mom has a plan B in case the owners do not file BK or do the loan mod. Their credit is most likley shot already and they don't care anymore.

Usually they just want to close that bad chapter of their life and move on.

If they said in August you won't see it in the paper in the legal section until the second Tuesday of July. If they mean they will start the foreclosure proces in August and advertise it you will see it foreclose in September.

I recently heard that the banks were going to have to honor a lease for a certain timeframe after they foreclosure. Not sure if that ever passed and I believe that it was a certain length that the banks were going to be required to allow the tenants to stay.
I have had the same question about disclosure of the pending foreclosure. I believe the owners should be responsible in letting the tenants know if in fact the owners have received a notice of foreclosure.

"Have to honor" would be a matter of state law.

Yes, this is correct. I believe the banks are required to allow the tenant to stay in the property the remainder of the lease and pay rent, as long as the rent is at market value. If the tenant is on a month-to-month lease, I think the banks are required to allow the tenant at least 90 days to vacate. I am sure there are very strict restrictions for all of this, such as showing a bona fide lease and the tenant not being related to the owner and so forth.

Back to the question at hand. No, it is not illegal, but it would be extremely unethical to not tell the prospective tenant. The eviction proceedings would begin the first day the bank took possession and YOU would get their deposit - not the bank... the tenant should also be told about that.