Unfortunate circumstances are inevitable. Property investors carry many risks because investments in real estate often involve a lot of money. There are times when investors find themselves overextended financially, which makes them face the possibility of foreclosure.

Despite the effort to reclaim financial control, landlords may not succeed in keeping their property. To make the foreclosure scenario worse – the landlord has existing tenants. It is even harder if they all have never committed any lease violation and have always paid rent on time. What can landlords do when caught in this dilemma?

Tenant Rights

Tenants in a foreclosed property have a certain level of protection under the federal Protecting Tenants at Foreclosure Act of 2009. The main components remain continually observed despite the act expiring in 2014. The federal act ensures that tenants who will face eviction from a foreclosed property will be given ample time to find new housing.

Upon foreclosure, new owners must give a 90-day eviction notice to existing tenants. During the 90 days, tenants do not usually have to pay rent. That is still a gray area, but most tenants caught in this situation withhold their rental payment.

If the bank takes over the foreclosed property, they may offer tenants an incentive in the form of relocation assistance. In exchange, the tenants must vacate the property in a broom swept condition before the 90-day eviction period ends. This practice is also known as “cash for keys.” As the term suggests, it means offering a tenant a certain amount of money to give up his keys to the rental unit.

Landlord Rights

The landlord is not legally required to inform his tenants about the foreclosure. Letting them know is more of an optional act of courtesy, not as an obligation. So it depends on the relationship of the landlord with his tenants.

However, whether or not the landlord withholds the information, tenants will likely learn of the foreclosure from telltale signs like a notice of auction tacked on the property.

Regardless of how they will learn about the foreclosure, they could withhold paying their rent. The landlord will gain the right to evict them for non-payment. However, that would not be a good idea given the foreclosure situation.

What happens to the rent collection?

If a foreclosed property remains unpurchased, the landlord can do anything to the property like how an owner would. As a matter of fact, the landlord can have the property rented to new tenants.

In most states, the landlord is not required to disclose the foreclosure status of the property to the new tenants. The landlord must first check state laws because, in states like California, it is a disclosure requirement.

If the landlord decides to rent to new tenants, only having a month-to-month lease is a more suitable option. Signing a long-term lease with a new tenant despite the landlord knowing that he is losing the property exposes himself to possible lawsuits for damages.

For the landlord to maximize the limited time he has to profit from the property, he needs to find tenants as quickly as possible. He can have his rental agent publish a listing on platforms like Padleads where it is easy to syndicate the listing to popular websites and reach more home hunters.

Until when can a landlord collect rent?

As mentioned earlier, as long as the landlord hasn’t completely lost the property to new owners, he can continually collect rent. However, once he loses it, he should never collect even a single penny from tenants. Doing so is a commital of fraud and theft. The tenants’ security deposits and last month’s rent given before the lease began must be returned as well.

Landlords of foreclosed properties must make the transition for their former tenants as smooth as possible. They are not directly responsible for unpaid mortgage, so it would be unfair for them to suffer extreme consequences due to the foreclosure. Maintaining a good relationship with former tenants can save a landlord from more headaches. A foreclosure is already terrible. A small claims lawsuit would only make it worse.