Living Rent Free in Distressed Property

Tenants claim rent isn’t due until owner resumes mortgage payments

by Robert Griswold

for rent signQ: We are in preforeclosure renegotiation of our first trust deed loan on our rental home. The loan on this investment property was a low teaser rate for the first two years but now the interest rate has been adjusted higher and our payments have increased by several hundred dollars per month.

We actually would have been OK with the higher monthly loan payment, but the rental market in our area has also been hard hit. There are so many vacancies that we had to lower the rent after the last vacancy. So the lower rent combined with the higher expenses means we have to invest additional cash each month and we are quickly depleting our savings.

We are not the only real estate investors in our area with this problem. However, we are the only ones (with) a tenant who also seems to be taking advantage of our tough situation.

We rented the property seven months ago to a couple and told them that we were in the process of a loan modification. They seemed to understand and wanted only a month-to-month rental agreement because they were going to be looking to buy a home soon.

They moved in and paid the first month’s rent and the security deposit, but they have refused since then to pay any rent because they say they are worried about the potential foreclosure hanging over our head and the house. They also claim that they were told by an attorney that if we are not making our loan payments they don’t have to pay their rent until we prove to them we are current on our loan.

We recently gave them a legal notice demanding the rent, but still no payment or response. Can they just continue to live here without paying any rent while we continue to negotiate with our lender? Will we need police to get them out?

A: Whether you are in a renegotiation of your loan or made all of your loan payments is not a legitimate reason for your tenants to withhold rent. There are many landlords who are not forthright with their tenants about the stability of the ownership of rental properties and there has been a push for legislation in many parts of the country to require landlords to provide full disclosure and/or lenders to honor certain minimum rental terms.

But I seriously doubt that an attorney gave them the advice to not pay the rent unless you prove you have made all of your loan payments. Besides, your tenants knew exactly what was going on when you rented them the property and they agreed to a month-to-month rental agreement.

They may be trying to increase your chances of losing the home by withholding rent. Their plan may be to purchase the home from your lender, as lenders that foreclose may be looking to quickly sell the property.

While some lenders will remove the current occupants and renovate and market the foreclosed homes, and some will even hold onto the homes waiting for the market to improve, other lenders may wish to sell the property soon to get the property off of their books.

In that case, the current occupants could be good candidates to purchase the home, and some lenders will even offer favorable financing. I would encourage you to contact an attorney immediately to get an eviction started.

Federal legislation, enacted in May 2009, does provide that tenants of a foreclosed property must be given at least a 90-day notice before they can be evicted.

Even if the tenants are not trying to game the system for their own long-term benefit, they are taking you for a ride. There is absolutely no basis not to pay rent on a month-to-month lease just because you are involved in a loan renegotiation or even foreclosure.

The police will consider this a civil, not a criminal, matter and will respond to your calls but will likely not intercede at all. Law enforcement will quickly learn that the tenant does have the legal right to live in your rental home under the rental agreement — so they are not trespassers or squatters.

It is up to you to take the appropriate legal steps to show in court that the tenant breached the lease by not paying the agreed-upon rent as required under the rental agreement.

It sounds like you were very slow to react to their nonpayment. You should have served them the three-day notice to pay rent or quit during the first month they didn’t pay, and you should have filed an eviction by the middle of that month. You will have great difficulty ever getting them to pay six months of back rent.

Ironically, if you haven’t received rent for the past six months you certainly would be expected to be in foreclosure! No wonder your savings are running low. Don’t let them continue to intimidate you.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of “Property Management for Dummies” and “Property Management Kit for Dummies” and co-author of “Real Estate Investing for Dummies.”

E-mail your questions to Rental Q&A at [email protected]. Questions should be brief and cannot be answered individually.

Copyright 2010 Inman News

See Robert Griswold’s feature, What Tenants Do When You Are Not Watching.

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