Renters Should Worry About Foreclosures Too

Renters have to rely on their landlord to pay their mortgage or risk eviction from their property at no fault of their own.

As the housing market gets worse, many landlords are losing their properties. Many tenants are forced to find a new place to live. In addition, they could lose prepaid rent and deposits.  Those can add up quickly if you had to pay first and last months rent in addition to a security deposit.

A tenant can try to recoup these fees by filing a legal claim against the landlord, but the landlord may not have any assets left after going through a foreclosure.  In most cases, a tenant would have trouble preventing eviction after a foreclosure if the lender seeks it. 

This scenario is quite common in states that attracted a lot of property investors a few years ago when real estate was hot.  It's been seen in Arizona, California and Florida where investors default if they see home prices falling and there is little chance of recouping their investment, let alone make a profit. 

With landlords dealing with increased job losses and other money problems, tenants are at an even greater risk of facing eviction.

How can a tenant protect themselves from eviction?

Do your homework. Find out when the property was bought and the mortgage was financed.  If the property was purchased at the peak of the market, this property could be a candidate for foreclosure, especially if the mortgage is an adjustable rate mortgage. 

Make sure the lease agreement has protections built in. Include a clause stating that the tenant has the option of terminating the lease without penalty if the owner is more than 120 days in default on the mortgage.  Try to include a clause that allows a tenant to check with the lender to make sure the landlord is keeping up the payments.

Record your lease with the county recorder.  This will allow tenants to get notice of pending problems.  Notices of a trustee's sale are sent to all recorded documents.

Deal with property managed by a third party management firm.  Technically, owners are required to return deposits in foreclosure cases, but in most cases the owner has no assets.  If the property is managed by a third party, deposits are usually held in an escrow account that the owner has no access to.