Foreclosing When There Are Tenants Involved.

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Foreclosing When There Are Tenants Involved.

For some investors, the purchase of a note is the means to an end: a way to acquire real property. For others, real property may be in an investment portfolio right along with promissory notes. For many, however, investment in notes started because they wanted to get out of the landlording business. Regardless of your intent in this industry, the simple fact remains: there is a very good possibility (if not a probability) you will someday acquire property through foreclosure. 

When the lender/investor becomes the highest bidder at its own foreclosure sale, there are two long-term solutions: sell it or rent it. Most note investors will choose the latter of the two because they are not equipped as landlords. Both solutions, however, benefit from a good understanding of landlord-tenant law so that you can maximize your return. 

You may ask, why is it important that you understand landlord-tenant law if you are going to sell the property? My answer boils down to profit. First, in the event of a foreclosure, you may be forced to evict the current occupant, a process which itself requires an understanding of the timeline and the costs to do so. Not to mention the fact that during the eviction process (which could be a few days to a few months) the occupant still has rights as a tenant, especially if that tenant was not the borrower. A solid grasp on the state’s processes will allow you to see if there are benefits to the bottom line (considering also the time value of money) if you were to sell the property with the tenant (holdover or otherwise) undisturbed. 

Even if your intent is to sell the property, it is possible that you could make significantly more profit by waiting to list the property (due to seasonality, market glut, etc.) or doing some minor cosmetic repairs. In either case, installing a tenant, if only on a month to month basis, can create cash flow and protect the property (remember that some insurers will not insure a vacant dwelling). 

In the event you, as a junior lienholder, acquire the property through foreclosure, it may be nigh impossible to sell the property at a profit without obtaining the consent and support of the senior lender(s). In this case, installing a tenant and collecting rent while negotiating a short sale or other exit strategy is a viable option. 

Finally, understanding the landlord-tenant relationship is important because it often carries with it an understanding of premises liability because, as the owner, you could be liable for injuries to guests, licensees, or even trespassers, caused by certain manmade or natural conditions. 

The best ways to protect your investment are through insurance and the hiring of competent professionals. As soon as you acquire real property through foreclosure, it is important to find an attorney, real estate broker, or property manager who can advise you on how to protect your investment and maximize your return.  

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Tyler, a licensed attorney, has a BA from UCLA and JD with distinction from University of the Pacific McGeorge School of Law. He is a member of the California Bar and has practiced in the fields of business, real estate, construction and syndication law. Mr. Happe is involved in all contract negotiations as well as the company’s syndication efforts, SEC compliance issues, fair debt collection practices and commercial acquisitions and divestures. He is founding partner of Happe Reid, PC, Attorneys at Law located in Fair Oaks, California.