Can a Landlord Collect Rent on a Foreclosed Property?

Many people who invest in properties may find themselves overextended, and with that comes the possibility of foreclosure. It takes a long while for the slow wheels of finance to turn, but eventually, you may finally find yourself on the verge of losing a property for good.

The problem is (besides the foreclosure itself), you have tenants. Let’s say they’re good tenants. They’re current on their rent and you’ve never had a problem with them. You’re concerned for their welfare, but also about protecting yourself.

So, what should you do?

Surprisingly, the answer is “not much,” even when you’re on the brink of foreclosure. Here’s an overview of your rights and obligations vis a vis your tenants.

Tenant Rights when Landlord is in Foreclosure

First, it may ease your conscience to know that your foreclosed tenants will be decently protected no matter what you do. Although the federal Protecting Tenants at Foreclosure Act of 2009 expired in 2014, its main elements are still widely observed.

Once you’ve lost your home, your tenants are entitled to a 90-day eviction notice from the new owners. During this time, they will usually not have to pay rent. (It’s a gray area, but the vast majority of foreclosed tenants don’t pay rent during the eviction period.)

Additionally, if the tenants are current with a valid, market-rate lease that was signed before your foreclosure, the new owners will generally have to honor it. An exception is when the new owner plans to move into the home themselves. If that’s the case, they’ll still need to give your former tenants a 90-day eviction notice.

If the bank is taking over your property, it may offer your tenants relocation assistance, typically called “cash for keys,” once the house has changed hands. This is generally tendered as an incentive to vacate the property (in “broom swept” condition) before the end of the 90-day eviction period.

Landlord Rights with a Foreclosure

Landlord Rights with a Foreclosure

First, you’re not legally required to let your tenants know you’re in foreclosure. Eventually, they’re going to find out, probably with a notice of auction tacked to their front door.

Whether you do tell them—and when—depends entirely on what type of relationship you have with them. It’s a courtesy, not a legal obligation. Be aware, however, that once you do tell them, they may decide to stop paying rent. If they do, you have the right to evict them for non-payment—but the odds are in their favor, considering the situation.

How to Rent a Foreclosed Home

Basically, until the day the foreclosed house has actually been purchased by someone else, you’re still the owner, and you can do anything any other owner would do. In fact, you can even rent to new tenants, right up until you actually lose the property.

Most states don’t even require you to tell the new tenants that you’re in foreclosure. But some do, including California, so if you want to bring in new renters while you’re in foreclosure, do some research on your state’s requirements and consider consulting a real estate attorney in your area.

One caveat would be to only rent month-to-month in this situation. If you’ve exhausted all your options with the bank, and are sure you’re going to lose the house soon, writing a long-term lease might make you liable to damages if the lessees decide to take you to court.

How long can a landlord collect rent on a property going into foreclosure?

A landlord can collect rent on a property going into foreclosure, but once you’ve actually lost the house, you must not collect a penny’s rent from your former tenants. If you do, you’re committing fraud and theft. You also owe them their last month’s rent and security deposit, if they paid those to you when they moved in.

It’s probably a good idea to tie up these loose ends. Although it’s rare, your tenants might sue you in small claims court for any added expenses your default brings upon them. Such suits are rare, because most tenants know they can’t expect much from someone who can’t pay their mortgage. Nonetheless, the specter of a suit should be incentive for you to get your documents in order, play nice with your tenants, and make their transition from the foreclosed property as easy as possible.