Purchasing a home that's in foreclosure (or was recently foreclosed upon) can potentially be a good deal. Banks are typically anxious to unload these properties, so buyers can often get the homes at less than the market value. If you purchase a home that currently has tenants, however, you have to be careful about how you handle the situation, or you may end up getting sued. Here's what you need to know.
Tenants Don't Have to Leave Right Away
Tenants are not required and cannot be compelled to leave until after the foreclosure proceeding has concluded. Even then, the law allows tenants to stay in the homes for a period of time after the new owners have taken legal possession of the properties.
Prior to December 2014, the Protecting Tenants at Foreclosure Act obliged homeowners to let tenants complete their leases. So even if the tenant had signed a one-year lease a month prior to the foreclosure, the new owner had to let the tenant live out the rest of the time outlined in the contract.
Although the act expired on December 31, 2014, state laws still require new owners to allow tenants to stay in the home for a least a few months. How long tenants have, however, varies from state to state. For instance, Washington law gives tenants 60 days from the date of written notice to vacate to leave the property regardless of whether they had a lease or were renting month-to-month. In California, though, new owners are required to honor the balance of tenants' leases.
Regardless, the net effect of the law means you won't be able to take physical possession of your new home right away. So you'll need to either live somewhere else until the tenants vacate or find a way to convince the renters to leave early.
You May Be Required to Pay Some or All the Tenant's Security Deposit
The foreclosure procedure terminates the previous owner's landlord rights and obligations to the renters, and some of those rights and obligations may be transferred to you. For instance, you are entitled to receive rent payments from the tenants during the months they are still in the home. However, in some cases, you may also be responsible for returning the renter's security deposit when the tenant vacates the property.
In general, the old owner is required to return the security deposit directly to the tenant before or after the foreclosure proceeding concludes. Alternatively, the foreclosed owner can transfer the deposit to the new owner. If this occurs, the new owner typically must notify the tenants they have the renter's security deposit, and the new owner becomes responsible for giving that money to the renter when he or she moves out.
In some states, such as California and Massachusetts, the new owners are responsible for returning the deposit money even if the old owners don't transfer the funds to them. If you fail to give the tenants the money they're due, the renter may have cause to sue you for the cash in court.
You are Liable for Issues with the Property
You become responsible for the property the moment your name is placed on the title, even though you may not be able to take physical possession of the house until months later. This means you are responsible for maintaining the home while the tenants are there, and you could be held liable for any accidents that occur on the property.
You want to be sure to inspect the home on a regular basis and speak to your insurance agent to ensure you have adequate coverage in case something happens.
For more information about dealing with tenants after you close on a foreclosed home, contact a real estate attorney in your area.