A couple of weeks ago, there was an 8-unit rental that went to foreclosure auction. The balance of the loan was only about 25% of FMV with no other liens on the property. I did some drive-by recon, and it looked occupied and in good condition. Obviously this deal had a lot of cash flow potential, but I passed on it because I am a total newbie and figured that would be a bit of sticky situation for a beginner.
For future reference, how do you handle tenant-occupied foreclosures after the sale? What are some of the benefits and pitfalls of this situation? Do the tenants have a legal right to stay there? Is there any way of obtaining a copy of their previous rental agreement if it wasn’t filed with the clerk of court?
It seems like a great tenant-occupied opportunity presents itself in my area every few weeks. I’d really like to start learning about what to expect from the process so I can take advantage of the opportunity when it presents itself. TIA for any wisdom you can shed on the subject.
You need to check with your State as far as particular laws for tenants’ rights. Normally, tenants are out of luck when a property goes into foreclosure.
If you plan on keeping the property as an investment or flipping it to an investor, it would probably be beneficial to at least keep the “good” tenants. When I buy a foreclosed property, I approach the tenants one by one, se how they live, ask for receipts to see their payment history and than make a decision with my gut feeling who stays and who needs to go. The ones that need to go, either I offer a few hundred dollars to move within 30 days (cheaper and faster than filing eviction) or I file eviction. As far as getting a copy of their rental agreement, depends on the tenant. Now, I have heard all kind of stories and some tenants take advantage of the situation:
a) “I have always paid on time, but the owner never did any repairs”; (big red flag when they say this)
b) “My rent was $400 a month”; (in reality it was $600, but with no lease, who knows …)
c) “I am moving by the end of the month anyway”; (just buying time …)
But please check with your State about tenants’ laws for your area.
Tenanted properties are great, it is awesome buying a distressed property that already cash flows and has huge upside. You can always raise rent and make changes which will sometimes drive out undesirable tenants. I recommend hiring a good property management company to handle this for you.
Thanks for the replies! I thought this property had already sold, but ended up getting rescheduled for the end of March thanks to our courthouse closing for snowy weather on the original auction date.
What should I look for in a good property management company?
I’m not sure what Louisiana rental laws are, but just as a heads up, in my area, I was waiting for my case at a landlord-tenant hearing last year where a 130 unit apartment building went on foreclosure. It was half empty. The tenant was being evicted for non-payment of rent. He stated he paid the previous management under the previous owner the rent owing. The tenant did not have a receipt and claimed he paid cash.
Guess what the judge determined?
The tenant got benefit of the doubt, he did not owe that rent, and the landlord’s eviction application was thrown out. I said to myself, “WTF? He paid cash directly to the manager and had no receipt?!”
The judge further asked the new landlord if the police were involved and the police told the landlord it was a civil matter.
Anyway, make sure you have a decent reserve in case stuff like that happens. Expect it and make an allowance for it. Good luck getting the applications if it’s not in the offer. But, 25% of what comparable buildings in the area have sold for in the area sounds like an awesome deal not to pass by though and worth the risk imo.
Hey Red29, I agree with the other advice noted above…find yourself a good property management company, let them be responsible for the rental laws in your State. It appears the property will not only cash flow, even with the cost of the property management company and you have equity…run to that deal like it’s the only pretty girl at the dance!
Go Get’em,
Ray
