The scary part is that many of these investors took the monthly rent and pocketed it.  They stopped paying the mortgage.  This leaves a tenant with few options once the home goes into foreclosure.  In Virginia, if the home is sold as a short sale while a tenant’s lease is in effect, the lease conveys.  If the home goes to foreclosure, the lease is void and the tenant is served an eviction notice.  Many tenants do not find out that their residence is in foreclosure until they are served the notice.  This leaves little time for them to collect money for a new security deposit (yeah, the security deposit you gave the guy who wasn’t paying the mortgage is probably gone), a first month’s rent, find a new place to live, and move.

On May 20, 2009 the Protecting Tenants at Foreclosure Act was passed as a smaller piece of the Families Save Their Homes Act of 2009 .  This bill ensures that tenants nationwide must be served at least 90 days notice to vacate the property if the purchaser of the foreclosed property intends to occupy the dwelling as their principle residence, and ensures that tenants can remain in the foreclosed property until the end of their lease unless the bank sells the property to someone who plans to occupy the property as their personal residence and 90 days notice to vacate must still be given. 

This is a victory for tenants across the nation who have been or could be effected by foreclosure.  However, this is another hurdle for buyers in today’s market.  Not many buyers are interested in purchasing a property with a tenant in place.  It will be very interesting to see how banks handle this new legislation.   Will they keep tenants in place while the property is on the market as an REO?  Or, will they serve the 90 days notice to vacate as soon as they foreclose on the property and wait to put it on the market?

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.