Looking At Rental Properties With A Whole Different Perspective
The more things change… well, the more they change.
In the past, when you represented a tenant in the lease of a property, it was understood that the tenant would provide authorization for the landlord to perform a credit check, if desired. This authorization, however, was a one-way street.
That was then… and this is now.
In the current real estate climate we find ourselves in – it would behoove you to inquire as to the financial stability of the landlord before allowing your client to sign a lease. It is becoming a more frequent occurrence to hear about another instance of a landlord losing a property to foreclosure during a lease.
While requesting the credit report of a potential landlord is an uncommon occurence – perhaps it should be as normal as the landlord requesting the credit report of the prospective tenant. After all – if the landlord defaults and loses the property to foreclosure, it will be the tenant who suffers.
If the landlord refuses to provide authorization to pull their credit file – perhaps they are hiding the fact that they have not been paying their mortgage… as is the case in many short sale situations I have seen. Yes, it happens. In the past two weeks, I have spoken with two three landlords who are defaulting with tenants in place.
Whether or not you insist on the landlord providing a credit report – you should make your client aware of the repercussions of a default on the part of the landlord according to the laws in your state.
Jeff Brown says:
Hey Doug — Haven’t checked lately, but in CA if there’s a lease as opposed to a month-to-month contract, the lender is bound by that agreement. There may be a requirement for the lease to be a year or more at origination. Are long term leases not honored in Georgia?
March 13, 2009 — 12:42 pm
Doug Quance says:
>Jeff: Not sure about the legalities in Georgia, as I haven’t been in the epicenter of such a transaction. 60 days notice comes to mind… but I’m not sure about the circumstances of which it would apply.
March 13, 2009 — 12:50 pm
Jeff Brown says:
Generally speaking, leases, especially ‘long term’ leases, are treated legally as ‘going with the property’, almost the same way an easement might.
March 13, 2009 — 12:57 pm
Doug Quance says:
BTW, in the leases that I have written for my landlord clients, I have always included language that would allow the landlord to give 60 days notice in the event the landlord decided to sell the property.
This language never stopped anyone from leasing.
March 13, 2009 — 12:57 pm
Doug Quance says:
>Jeff: Hmm… if that were the case – what would stop a property owner from signing a five year lease for a ridiculously low rent?
In CA, would a bank be forced to honor a five year lease at $50 a month for a $500K property?
March 13, 2009 — 1:01 pm
Jeff Brown says:
I was referring to arm’s length market transactions only. What you’re referring to is fraud. Leases in CA are viewed, when over 1 year, as having an ‘interest’ in the property. They’re honored.
March 13, 2009 — 1:07 pm
Doug Quance says:
That’s interesting. Of course, the $50 was simply a stretch… but I showed a property recently that has a market value of roughly $800K… but the current asking rental price is $2500. (They tried to get more, but could not.)
My client could have rented this property – arms length transaction – for a few years. In the event of default of the landlord – who would determine if this was an arm’s length transaction at market value? Surely the lender wouldn’t want to honor this lease, though it would be legitimate in every way (other than Bawldguy economics, natch).
March 13, 2009 — 1:18 pm
Jeff Brown says:
It comes down to the sanctity of the contract, which is the foundation of most of what business does. Contract law is literally apathetic to the desires of lenders, and thankfully so. They’re just another owner, who must honor the long term lease.
Expand this to a shopping center, housing long term leases as the norm. The foreclosing lender has its own idea of who should be there. Should he be able to tell Von’s, WallMart, and The Cheesecake Factory to leave, because it’s what they ‘prefer’, regardless of the lease contracts?
Chaos would ensue. I see your point though, but it gets trumped by ‘sanctity of contract’. Parties coming in after the fact don’t gain omnipotent powers over arm’s length contracts negotiated in good faith.
March 13, 2009 — 1:35 pm
Michael Cook says:
This is a really important issue. My brother was renting an apartment in LA and was told by the bank he had to move. He had been paying rent to the landlord, who was pocketing the money and not paying the mortgage. He ended up having to leave and losing his deposits. Obviously, the first thought is to sue, but if they are not paying the mortgage its probably not worth the time.
March 13, 2009 — 1:37 pm
Doug Quance says:
>Jeff: And I see your point, as well. Of course, these days – if a commercial tenant is paying as agreed… then they should be left alone. 🙂
>Michael: Your brother’s story is one that I have heard. Maybe this post will elicit some responses from some legal beagles.
March 13, 2009 — 1:46 pm
Eileen Pettengill says:
In Las Vegas, tenants are being evicted left and right,due to foreclosures even with a lease in place. The sad truth is that there are some owners that are knowingly renting while a NOD has already been filed, and unfortunately, some of those owners are agents. I always check for my clients, but even if there is nothing on file today, that doesn’t protect them tomorrow. It is a full time job reporting on these guys.
Buyer(renter) beware!
March 13, 2009 — 4:50 pm
Doug Quance says:
>Eileen: Yes, renter beware!
March 13, 2009 — 5:19 pm
Cheryl Johnson says:
NLIHC (The “National Low Income Housing Coalition”) has an interesting chart of State by State Foreclosure and Eviction Practices https://www2398.ssldomain.com/nlihc/doc/State-Foreclosure-Chart.pdf
March 14, 2009 — 3:32 am
Doug Quance says:
>Cheryl: Thanks. That does shed some nationwide light on the subject. 🙂
March 14, 2009 — 8:52 am
Ashlee says:
It is a very bad situation that some tenants are in. I just recently leased a house to some long time clients of mine and two months after being there they got the forclosure notice. The owner did not even have the courage to call and tell them that this was happening. They just saw the notice from the judge. As most of us know, he was already behind when the process was started and he still never said a word. Not even to his realtor who was representing him!
March 15, 2009 — 1:40 pm
Doug Quance says:
I showed a townhouse today to a client who wants to lease it – but we will insist that the deposit be held in the leasing broker’s trust account.
We can’t predict the future… but that is a small thing we can do to protect the tenant to some extent.
March 15, 2009 — 5:52 pm
Shannon Ensor says:
Wow, good point! We could go a little further and request a referral list from previous tenants to see if the landlord is prompt is making repairs or even an inspection done on the property so that the tenant knows the place isn’t ready to fall apart! (I know its a little off subject from your point, but I just had a situation where a tenant-client would have appreciated both of these!) Overall, maybe a little more protection for the tenants would be nice.
March 15, 2009 — 8:05 pm
jay says:
I feel concerned about giving anyone enough personal information to conduct a credit check on me, especially with the amount of identity theft out there. Even when you are being as vigilant as possible to ensure that your personal information is not compromised, the risks are still great. You can hardly expect that your prospective landlord would protect your personal information with the self-same vigilance.
I have been a landlord in the past, and I have only ever required proof of employment as well as personal references from a credible source (i.e. a professional).
March 20, 2009 — 6:06 pm