Tenants' Rights Following Foreclosure or Short Sale of their Rented Home
Not all underwater homes are owner-occupied. In many cases, homes that are threatened with foreclosure are rentals. How does the prospect of foreclosure affect tenants who are living in an underwater rental home?
The impact on tenants ultimately depends upon how the property owner chooses to deal with the threat of foreclosure, and how much they choose to communicate with the tenants about the situation.
If a property is going into foreclosure, according to recently passed Washington State law, the Trustee is required to give tenants of a rental property facing foreclosure a minimum of 90 days’ notice before the foreclosure sale date. The Trustee was already required by law to post notices of the foreclosure on the property, but the new law requires them also to mail notices of the foreclosure sale to the tenants. This foreclosure notice is not an eviction notice; it is simply to make sure that the tenants are informed about the situation.
A landlord who is facing foreclosure may choose to try to do a short sale, in order to avoid being foreclosed upon. It is generally easier to sell a property with tenants who are on a monthly lease than on a fixed-term lease, because the tenants can be evicted with 20 days’ notice if they are on a monthly lease; this makes the property more attractive to any potential buyer who intends to occupy the home.
For this reason, if tenants are on a fixed-term lease, landlords might approach them about converting to a monthly lease in exchange for an incentive of reduced rent. Tenants are not required to change the terms of their lease if they do not want to, but the reduced rent offered may make it worth their while to do so.
Tenants requesting a Short Sale
Receiving notice that the home you are renting is facing foreclosure may open the possibility for some tenants to purchase the property as a short sale. If you are a tenant and are in the position to obtain financing, this is an opportunity not only to avoid having to move, but to purchase a home at a discounted price.
Most lenders will consider allowing a tenant to purchase a home that they are foreclosing on as a short sale, because lenders usually will recover more from their bad mortgage through a short sale than they will through the long process of foreclosure - especially a short sale with an interested buyer already in place. The landlord will also usually be open to a short sale, as it will be a faster solution, as well as much easier on their credit rating, than foreclosure would be.
If you would like to purchase the home that you are renting as a short sale, you should contact your landlord, the owner, as soon as you are aware that the property is in trouble. The sooner you get the short sale process started, the more likelihood you will have of succeeding with the deal.
The regulations governing how much notice renters must receive to vacate is different for a property that has been foreclosed upon than it is for a property that has been sold (including through a short sale). Here is some general information regarding the regulations in Washington State, and on the rights and obligations of tenants:
Eviction following Foreclosure
Within the context of a foreclosure, the 20 days-notice to vacate is not applicable. Following a foreclosure trustee sale and after the transfer of the property to a new owner, regardless of whether it’s a fixed-term or month-to-month lease, the new owner may give notice to the tenants to vacate.
Washington State law requires a new owner to given tenants a minimum of 60 days’ notice to vacate, but this is effectively superseded by federal law, which requires a minimum of 90 days’ notice. These timelines apply only to the case of a new owner following foreclosure and a Trustee Sale. As a tenant, you must choose whether to take the 60 days’ notice, or assert your federal right for the 90 days’ notice - because you receive different benefits depending upon which you choose.
If you intend to continue occupying the home for the full 90 days, you should let the new owner know that that is your intention. Since you are asserting your right to occupy under federal law, you must also obey federal law, which requires you to continue paying rent. You are also required to meet any other obligations specified under the original lease contract.
However, if you only intend to occupy the property for the 60 days specified by state law, the state law mandates that you cannot be evicted for failing to pay rent. In effect, you may continue to occupy the property for free for up to 60 days following foreclosure. (You still could be evicted during this period for committing waste or nuisance, however). If you stay beyond the 60 day “free” period, the new owner may file suit against you and force the eviction through an unlawful detainer action. You don’t want that eviction to come up during a background check in the future when apartment hunting.
You can, of course, always decide to sign an updated lease with the new landlord if that is presented to you as an option following foreclosure.
Eviction following a Short Sale
When the property changes hands through a normal real estate transaction or through a short sale, the new owner enters into the same lease agreement with the tenants as the previous owner had. The previous owner transfers the security deposit that the tenants paid to the new owner. In other words, the prior lease agreement is binding on the buyers.
If the rental agreement is on a month-by-month basis, according to Washington State law, the landlord must give the tenants a minimum of 20 days’ notice to vacate. If the 20 days are within a rental period that the tenant has already paid rent for, the tenant may be due a pro-rated partial rent refund.
If the rental agreement is for a fixed time period, the new owners must honor that agreement.