Tenancy in a Foreclosure-- what are probable scenarios?

Question

Hello all!

I have a question for the pros who deal with foreclosures (the process itself, selling them, etc). I have found a house that is in foreclosure that is being advertised for rent. This is in a city with a very hot market for both sales and rentals-- everything gets multiple bids/ rental applications within a day! So my family is moving to this city and looking  for a place to rent for a year or more while we get to know the area and decide where we want to buy (and pray very hard that the market will cool down!). This house for rent popped up that was several hundred dollars below market rent. A 4/3/3 house in a stellar neighborhood renting for the price of a 3/2/2... What's going on? Well, a call to the property manager revealed that what's going on is that the house is in foreclosure. The current owner is renting it out while going through the foreclosure process. I guess that's why they are asking below market rent- make money from it while they can!

Anyway- the property manager was honest about the fact that, after the foreclosure, we might be asked to leave with 30 day notice. Or that we can leave with a 30-day notice. Not what we want, since we would prefer to stay for the whole year. But it got me thinking....

1. If we rent this house, is there any possibility that we could buy it before the foreclosure goes through or once the process is over? Would we, as tenants already in the house, be given any kind of special consideration or "first dibs" in buying the house when the bank is ready to sell it? [ Follow-up: I realize that this is unlikely, since the market is so hot... But is there any chance that we could get this house for less than market value?]  Or will they ask us to leave as soon as the foreclosure is complete?

2. How long do foreclosures take? This one appears quite complicated and has been dragging on since 2016. [Yes, I looked up the foreclosure lawsuit. :)]  We won't rent it if we are likely to be thrown out when the foreclosure goes through a month later, but we would consider taking a chance if we could live there for a whole year! Especially if we got a chance at buying the house at a discounted price.

Some details: Similar houses in the immediate neighborhood have sold for $295,000- $315,000 in the last year, mostly in the second half of 2017. The principal owed on the house currently is $195,000ish.

Any answers much appreciated!!

Jon Holdman · Answer

@Patsy Waldron you could try to buy it right now, before the foreclosure sale.  That would be a purchase from the current owner.  Ideally your purchase price would be enough to let the owner pay off the lien that's foreclosing and all others.  The problem will be if the total amount needed to clear the title is more than you're willing to pay.  In that case, a short sale would be needed.  That may or may not be possible.  Worth a question to the owner, if you want to pursue this.

Ron S. · Answer

The key words in the OP's post was "Principle Balance". Considering it's been in foreclosure since 2016, I'm confident "Principle Balance" and "Payoff Amount" are worlds apart.

Also, while 90 days is the norm after the foreclosure before you have to move out, you would not be considered a bona fide tenant considering your rent would be below market value. Will they give you 90 days? More than likely. Are you guaranteed that? It does not appear to be the case.

Jon Holdman · Answer

When you purchase a property you do it via a title company or attorney.  East coast uses attorneys, most of the US uses title companies, IDK about OH, so I'll use "title company".  Part of that process is for the title company to do a title search and identify all outstanding claims against the property.  That would include the first mortgage.  They will request a payoff from any claimants.  The title company is the one that distributes money.  The seller would never see the payoff money.  It would go directly from the title company to the lender.  The sellers would get a check for anything that's left after paying off all liens.  If there is not enough money coming from the sale to pay everything off, the seller will have to bring cash to closing to complete the transaction.  I've never had to do that on a property, though I did once when selling a car.  If the seller is unwilling, the deal cannot close.  If that's the case, the only way to proceed would be a short sale.  That requires approval from the lender.

For this deal you should start by contacting the LLC and asking if they will be willing to sell and if so at what price.  They should have a pretty good idea what the lender wants.

Jon Holdman · Answer

You would need to research the OH foreclosure auction process, but generally those auctions are cash on the barrel head.

From what you wrote, what happened is the former owner stopped paying both HOA dues and her mortgage.  The HOA foreclosed and took possession of the property.  They would have, at that point, owned it "subject to" the first mortgage.  That is, the first mortgage is still valid.  The HOA then sold it to the LLC.  Presumably the LLC's members were aware of the first, though perhaps not.  A very common newbie mistake is to buy at or after an HOA foreclosure without realizing there is an outstanding mortgage.

Then, in 2016, the first mortgage lender decided to foreclose.  They have that right.  They should have been notified during the HOA foreclosure, and really should have started their foreclosure then.  But perhaps they were overlooked.

The LLC that owns it and that is renting but (apparently) not paying the mortgage is "rent skimming".  This, IMHO, borders on a scam.  Could well be the case that they were unaware of the mortgage until after they bought the place, and are trying to recoup some of their losses.  But I've also heard of people deliberately buying at HOA foreclosures and either living in the place or renting it out until the senior lenders get around to foreclosing.

This LLC would be the one to approach to buy the property.  You should be able to find their registered agent on the  secretary of state web site.  That would be your point of contact to try to buy.

Patsy Waldron · Answer

Thanks, @Jon Holdman- I've tracked down the registered agent and will reach out to her to see whether the LLC would consider selling. If it does, and the price is right, I'll get in touch with a RE attorney to get the ball rolling. It's probably a long shot, but hey-- you miss 100% of the shots you don't take, right?  ;-)

Patsy Waldron · Answer

Thank you for this explanation, @Jon Holdman. Very helpful. I was wondering why the HOA sold it to the LLC for so little-- but it makes sense that the HOA didn't want to be making payments on an almost $200K mortgage!

So if we buy it from the LLC, would the bank then stop the foreclosure process? How do we make sure that what we pay goes to satisfy the original loan, and the LLC doesn't just pocket it? Obviously we don't want to be embroiled in an expensive lawsuit against a big bank!

Patsy Waldron · Answer

@Uchenna A. @Ron S. @Jon Holdman

Thank you for your input, everybody! This foreclosure is kind of weird. From what I gathered from my reading of the court papers, the current owner is not in arrears on their mortgage. The house is being foreclosed on by a previous owner's mortgagee! That previous owner stopped making her mortgage payments in July 2014, lost the house to the neighborhood association (had obviously also stopped paying association dues), which then sold it (for peanuts!) to the current owner, an LLC. Then in 2016 the bank that held the original owner's mortgage sued. It is asking for remaining principal ($195,400) + interest, escrow, title search, title exam, filing fee, and attorney fees and costs. As Ron mentioned above, the payoff balance is likely far higher by now, with 4 years of non-payment! Not to mention attorneys' fees and the other stuff.

The case finally went to a judge in April. We wouldn't mind paying the remaining principal and then some... but it sounds like the waters are very muddy as far as who can legally sell the house at this point! If nothing else, this is an example  of why title insurance is important, I suppose!

If/when the house goes to auction, I imagine that someone with cash is who will get it, rather than a buyer like us, who needs a mortgage...???  :-(

Patsy Waldron · Answer

Dang... Now what I wanted to hear, but good to know. Thank you!

Tenancy in a Foreclosure-- what are probable scenarios?

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