What Happens When a Rental Property Goes Into Foreclosure?
Foreclosures do not only happen to a primary residence or homestead. There are instances where a house used as a real estate investment rental property can be foreclosed in the event of non-payment by the owner. In these situations there is some recourse offered to any tenants currently living there.
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Foreclosure Notice
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When a property is in danger of foreclosure, the notice is sent both the last mailing address on file for the owner as well as the rental property address. This will provide the tenant with warning of a pending foreclosure sale. While this is not a notice to vacate, it should make the tenant aware that other living arrangements might have to be made in the near future.
Cancellation of Lease
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While tenants do have certain rights that will prevent them from being kicked out into the street with nowhere to live, it is important to note that once a property has been foreclosed on and put up for auction, the lease agreement they signed with the landlord is no longer valid, and their landlord no longer has any ownership rights or interest in the property. It's up to the new owner to decide how much time you have to vacate, if at all.
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Foreclosure Auction
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Once the property has been put up for auction and sold, a tenant has approximately 21 days to vacate the property.
If the property was sold to an investor, that investor might be willing to either extend the lease for a short period of time, or continue leasing out the property for a longer duration. This will be largely dependent on the objective for the investor to either hold the property as a long-term investment or attempt to turn it around for sale.
If the home is sold to an individual who intends to occupy the property, the new owner can evict them after they have closed on the home. At that point, the rights available to the tenant are very limited if not completely extinguished.
Cash for Keys
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When a home is retained as a bank-owned property (in the event that there were no suitable bids at the auction), the bank will want to resell the house as quickly as possible. The bank is looking for a short-term return on their investment, and renting a property out for any length of time can hinder that sale.
Instead of giving the tenant 60 to 90 days notice, they will offer them "cash for keys". In other words, the bank will offer to settle with the tenant a fixed amount for them to vacate the premises sooner than later (usually 20 to 30 days). Should the tenant agree, the transaction can be completed in as little as a few days.
If the tenant does not agree, the bank can (as the owner of the property) legally begin eviction proceedings.
State Law
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When it comes to property and ownership rights, each state has their own laws legislating how all parties are to proceed. Each state has a law regarding real estate ownership and the rights of a renter. For example, in a state like Texas, tenants' rights are very limited, and evictions can be completed very quickly. In California, on the other hand, tenants have more rights under state law, and may be able to stay in a home for the duration of their original lease, or longer.
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References
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