Foreclosures with Tenants — How to Comply with the Law and Minimize Your Risk of a Lawsuit

hands holding a set of keys

The National Multifamily Housing Council estimates that around 43 million households or 109 million people are renters in the United States. So it’s likely that  at some stage as a real estate professional, you will come across foreclosure sales with tenants. 

Foreclosure sales with tenants are not as straightforward as regular listings. Real estate agents need to ensure compliance with the Federal laws and protective measures in place to protect tenants living in foreclosed properties. Failure to comply comes with harsh consequences and also makes you vulnerable to lawsuits if things go wrong due to your actions (or inactions). 

The COVID-19 pandemic has also brought with it additional challenges, particularly with the current moratorium on evictions. 

Here are  the risks and potential issues you face when dealing with tenanted foreclosures, as well as  action steps you can take to protect your real estate business. 

Federal Compliance

The Protecting Tenants at Foreclosure Act 

Your main concern should be to ensure that the property is being managed according to the law. The legislation that governs tenants living in foreclosed properties is The Protecting Tenants at Foreclosure Act of 2009. The Act protects tenants from immediate eviction by new owners (usually the bank) during the foreclosure process. It allows tenants sufficient time to find alternative housing, and it states that tenants must be provided with a minimum of 90 days notice prior to eviction. In some cases, state laws may require a longer notice period.

Bona fide tenants are able to live in the property for the remainder of their lease agreement period, except if:

  • There is no lease agreement or the lease is able to be terminated under state law, or
  • The property is sold and the new purchaser will occupy the property as a primary residence. If this happens, 90 days notice to evict is required.

What constitutes a bona fide tenant? 

A tenancy is considered bona fide if:

  • The tenant is not the mortgage holder or a close relative (child, spouse, or parent) of the mortgage holder
  • The lease was the result of an arm’s length transaction, and 
  • The lease does not involve rent substantially lower than the market value or subsidized by federal, state or local subsidies. 

What does this mean for you as the real estate agent?

It’s not just your clients that must abide by The Protecting Tenants at Foreclosure Act. All third parties acting on behalf of the property owners must as well. This includes real estate professionals and attorneys at law. 

The COVID Effect

In March of this year, President Trump announced a temporary moratorium on evictions and foreclosures due to the coronavirus. This only applied to mortgages insured by the Federal Housing Administration, an agency of the Department of Housing and Urban Development that backs affordable home loans. Various additional moratoriums were then announced at the state level, to ensure controls on foreclosures and evictions were in place to prevent the spread of the coronavirus. 

Since then, in September, President Trump announced further assistance to renters and homeowners. This prompted the Centers for Disease Control and Prevention (CDC) to issue an order to temporarily stop all residential evictions. This ban supersedes all state eviction orders, however, the onus is on the tenant to tell their landlord they require this protection. It is not automatic. 

This current CDC moratorium is due to expire December 31, 2020, unless it is extended. However, landlords can still charge late fees, and rent continues to be owed every month. This means for some tenants, they will face significant debt after the moratorium finishes.

Minimizing Your Risk

Report Non-Compliance

If you are aware of violations and non-compliance with the laws around tenanted foreclosures, you should take action. This means reporting the financial institution who now owns the property to the federal regulatory agency that oversees them. To find out which regulator to contact, visit the Federal Financial Institutions Examinations Council website.  

Keep Updated

It’s a challenge to keep up with the changing regulations due to COVID-19, but real estate professionals need to stay updated on the requirements. Subscribe to the Centers for Disease Control and Prevention updates, follow announcements from your state and local representatives and keep up-to-date with news reports each day. 

Ensure You Have Real Estate Errors and Omissions Insurance Coverage

If a tenant is wrongfully evicted and you are involved as the real estate agent, you could be sued. This could cause you significant harm financially and damage your reputation irreparably. 

Ensure you have sufficient insurance protection. With CRES Real Estate E&O + ClaimPrevent®, you’ll have comprehensive coverage and insurance protection specific to the real estate industry. You’ll also have access to expert Pre-Claim Legal Services 7 days a week, to help you prevent claims before they happen. 

Contact the CRES team at 800-880-2747 to find out more today.

This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.

Originally Published November 4, 2020

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