With all the foreclosures, short sales, and financially troubled people today, some of you may be renting a property that itself is in foreclosure. So now you may be wondering what your rights and options are, and what you'll need to do in case your property is in default on your loan.
First of all, you don't need to worry about getting kicked out in a short span of time. Most states or cities laws require plenty of notice to the tenants in case of a foreclosure, so check your local laws if needed. And if it is sold via foreclosure, many new owners might happily allow you to stay as a tenant after your previous landlord is out of the picture. So here is some guidance for you – but note, however, that all situations, state laws, owners, and banks may have different rules, regulations, timeframes, and procedures that may differ from what is noted below.
If the property is in default, the owner may not care or do anything to stop the process. But despite this, you are still required to pay him rent because you have a lease agreement with him, even though he’s probably not paying the mortgage. You could plan to move at the end of your lease to a place that isn’t in flux, or you could just stay, though the latter is subject to your negotiations with the landlord on a lease. Staying may not be too bad of an idea either, as it could take a couple of years before the property loan default issue is resolved. In other words, there is no need to stress because you aren’t in trouble either way. However, be sure to work with the existing owner so that if your rental property does eventually go through foreclosure, you can work with the new owner too and resolve the situation.
If the owner is trying to sell the rental property via a short sale, you should keep on good relations with him as well as keep the place in good shape and tidy. Make sure he notes in his real estate listing the term of your lease for any potential buyers because any new owner would have to honor the existing lease until it expires. An investor may buy it and leave you right there as his tenant, so don’t impede the sale. However, also take care to work on a new lease or even property vacancy if that is the new owner’s desire.
Another situation you may find yourself in if your landlord is facing foreclosure is that the property could end up being owned by a bank. In this situation, don't fret, though your lease is technically void. The city or state will still have some protections for you, but the more likely course is that you can stay there rent-free for several months until the bank starts the process of getting you to vacate the unit. They may offer you cash for keys to get out – take it! If you want to fight, they will have to evict you, and I don’t recommend forcing someone to evict you. It goes on your credit reports and will follow you for a long time, so instead, work with the bank towards a resolution that's satisfactory for all parties.
The last situation you may face is if your rental property goes through foreclosure and ends up being owned by an individual investor. This could be a little trickier if they want you out ASAP and take an adversarial approach to you. Your best bet there is to try to negotiate a new lease if you want to stay, and remind them about how you’re already in the property, so they won’t have to make any repairs and won’t have any vacancy regarding rent. If they try to raise the rent after this talk, let them know that you’ll leave as a result, so try to negotiate. If you have to lease, in some states the new owner is required to honor your security deposit, but many may try to get out of it, so negotiate with them or just dictate (talk to a lawyer) that the security deposit serves as your last month’s rent. They won’t like this, but that may be a good option for you. And there really may not be much the new owner can do about that because they have no valid lease agreement in place with you, and your old lease with the prior owner is void at foreclosure. Again, either way, try to work with the new owner to resolve any issues.
Remember, there is no need to stress. Since you have possession of the property, you have a lot of negotiating power to say to the owner how and when you will leave (subject to your being reasonable). If they harass you or threaten you, make sure to contact the police and/or local housing authority or a lawyer for guidance on how to proceed. But overall, working with the new owner will give you the best outcome and the lowest amount of stress in what could be a stressful situation. Good luck!