Can we lease to default borrowers of a foreclosed REO in TEXAS?

[Bhanu P.]

We closed a REO property in Texas and former owners are still living in the property and when we approached them to give 3 day notice, we learned that they are interested to lease from us for an year.

In normal situations, we do not entertain this scenario but they do qualify our rental qualification and they are so much motivated to stay in the house and wanted to buy it back in an year or so.

Note: We have not agreed to sell it or never given any option for them to buy it back from us. We anticipate these people can be potential long term tenants.

Question is, can we lease the property to foreclosed borrowers or do we face any legal challenges?

Is it going to be regular lease transaction and we can evict them in case of non payment of rent or do they still have any additional rights than the regular tenants since they own the property before mortgage foreclosure by their lender???

Like to hear from someone who did this and experienced the similar situation. Thanks in advance!!!

[Andy Mirza]

Originally posted by @Bhanu P.:

We closed a REO property in Texas and former owners are still living in the property and when we approached them to give 3 day notice, we learned that they are interested to lease from us for an year.

In normal situations, we do not entertain this scenario but they do qualify our rental qualification and they are so much motivated to stay in the house and wanted to buy it back in an year or so.

Note: We have not agreed to sell it or never given any option for them to buy it back from us. We anticipate these people can be potential long term tenants.

Question is, can we lease the property to foreclosed borrowers or do we face any legal challenges?

Is it going to be regular lease transaction and we can evict them in case of non payment of rent or do they still have any additional rights than the regular tenants since they own the property before mortgage foreclosure by their lender???

Like to hear from someone who did this and experienced the similar situation. Thanks in advance!!!

I don't have experience with TX so you really need to know your state's laws because they will trump my info. That being said, I have never heard of any legal ramifications for renting to previous owners. I don't think it's a "best practice" because of the assumption that foreclosed homeowners are financially unsound because their decisions led them to that particular outcome. However, every case should be looked at individually on its own merits and it looks like you've done this.

As a lender that forecloses on non-performing notes, I have the ability to know what a borrower is like before we foreclose and take title to the property as REO. If the borrower did anything except what I consider the "honorable" thing, I would never rent to the former borrower. I feel that would leave us open to liability in case the borrower decided to fight us post-sale. Better to have a clean break and have the former occupants move on.

This doesn't apply to 3rd party purchasers at foreclosure sales or someone who buys the REO from the bank. I bought over 20 condos at trustee sales in 2011-2013 in CA. We had one where we immediately rented to the former owners and they've been with us ever since with absolutely no problems. I've had most of the common scenarios, mostly with tenants, but it is still a crap shoot when you inherit previous occupants. It can go either way when you haven't had a chance to vet the occupant.

In your case, they've qualified under your current standards for tenants. I think it's ok to rent to them. They know that you're not the bank, they understand the situation, and they are motivated to stay.