Pre-Occupying Foreclosures and Short Sales
The real estate market is beginning to see a trend in the time it takes to close on a property. Unfortunately, it is taking longer to close than it has in the recent past. Gone are the days of 15-21 day closing periods. We are now seeing closing periods of 45-60 days on average. However, buyers in this market usually don’t have 45 days to wait to move into a home. Many times buyers need housing in 14-30 days. Combine longer closing periods with an abundance of short sales. Even though we are being told that banks are streamlining the short sale process, short sales are still taking upwards of 6 months to get approval. So, where does this leave today’s buyer when it comes to housing between the sale of one home and moving into the new home, or waiting out the short sale approval period? Many buyers have begun to reexamine pre-occupancy.
For those of you not familiar with pre-occupany, it is the act of a buyer taking possession of a property before settlement for an agreed upon fee. The buyer typically pays a security deposit to the seller and a monthly fee, much like a rental payment. I’m here to tell you that pre-occupancy is a bad idea in this market for a number of reasons.
The seller is a bank in a foreclosure transaction. I have yet to have a foreclosure bank agree to pre-occupancy. Why? If a buyer moves in to a foreclosure before they settle and then realize that there may be more work involved with the property than they originally thought, the buyer may be tempted to move out, default on the contract, and refuse to settle. Banks are also not equipped to be landlords. Foreclosure banks already sell properties “as-is.” What happens if something breaks while the buyer is pre-occupying? Who is going to fix the problem? The Virginia Landlord Tenant Act requires some repairs to be made by landlords, banks don’t make repairs. Pre-occupying a foreclosure isn’t compatible with the way foreclosure banks do business.
Short sale pre-occupy is an even worse idea. The sale of the home is contingent on third-party approval. This approval can take up to 6 months; I’ve seen it take 9 months. What happens when a buyer pre-occupies a home and then 4 months later the short sale bank denies the short sale? The buyer gets to move out of the property and into temorary housing while they look for another home. Or even better, the short sale/foreclosure bank evicts the would-be buyer. What a headache! Pre-occupancy agreements involve paying monthly fees, rent payments, for the time the buyer moves in to the time the buyer settles. Most short sale sellers are already not paying their mortgage. As a REALTOR, I can not reccomend that any of my buyers pay money to a short sale seller and hope that the seller actually pays their mortgage with it. Again, it just doesn’t make sense.
Believe me, I know moving is stressful, especially when you are afraid you aren’t going to have a place to move to. I’ve would never recommended pre-occupancy, no matter what the market looks like, but pre-occupying a foreclosure or short sale is not the best solution and may cause more problems than you are equiped to deal with. Talk to your REALTOR about available alternatives to pre-occupancy. Also, make sure you begin your new home search in time to meet your moving deadline.
Our situation is a little bit different. We were given 32 days notice that our lease was not being renewed. In such a short time frame, the only place we could find in our price range was a property that was in preforeclosure. The owner of the property agreed to rent to us on a month to month basis, and told us his bank would not foreclose if he put it on the market and the bank would authorize a short sale. After we had been in the house for a month, the property was listed for $174,900. By comparison, a property next door that is nearly identical (although in better condition) is on the market for $225,000. As a result, the past week we have had half a dozen showings, and we are trying to get our ducks in a line so we can apply for a mortgage and make an offer ourselves.
We knew when we moved in that it could be a short-term situation, and we continue to look for other properties that are more stable. The question I have been trying to determine is if this situation is covered by the Protecting Tenants at Foreclosure Act of 2009 as a short sale. The lender has filed a request for foreclosure in the local district court, but as yet there has been no hearing. The clerk in the court said the hearing would not be set until an attorney for the lender requests one. So it looks like they are content to try the short sale route, but if that fails, then they request the hearing, and there is no doubt they would prevail, as the mortgage hasn’t been paid at least since last November.
To wrap up, are short sale tenants entitled to 90 days notice the same is a tenant who is renting a foreclosed property?
Thanks in advance.
Jim
Hi Jim! From what I understand of the Protecting Tenants at Foreclosure Act, it does not cover short sales. However, there are other protections already in place that could protect you. As always, I recommend that you consult a real estate attorney in your area. I do know that in Virginia a lease will convey with a purchase, this includes a short sale. However, you signed a month-to-month lease and this is a bit different than a one-year lease. You need to look at the clauses in the lease for either party giving notice that the lease is not being renewed for the next month. The lease terms need to be adhered to. In a foreclosure, the lease becomes void and does not convey. This is why the Act was created. Tenants had no protection. Now they have a little protection.
I hope this is somewhat helpful, but again, I’m not an attorney. Let me know if you have any other questions!