Buying A Foreclosed Rental Property? New Laws Make It Tricky

In 2009, both the U.S. Congress and Oregon’s legisla­ture passed new laws protecting residential tenants in properties where a lender is foreclosing. As a result, any buyer at the foreclosure sale must investigate the status of tenancy at the property and give significant notice before possessing it.

Although this may not be an issue in multi-family housing where tenancies are usually preserved, it could be a big problem in single family dwellings and smaller “plexes” where the goal is to obtain property free of tenants.

Federal law

The federal law is 12 USC 5201 et seq. and is known as the Protecting Tenants at Foreclosure Act of 2009. This statute applies in the case of a foreclosure on a federally-related mortgage loan on any dwelling or residential real property. A federally-related mortgage loan is one secured by a lien on residential real property where there is a structure for occupancy of from one to four families, or a manufactured home. It must be made by a lender whose deposits or accounts are insured by any agency of the federal government. Also it applies if the loan is made, insured, guaranteed, supplemented, or assisted in any way by any officer or agency of the federal government, or in connection with a housing or urban development program administered by any officer or agency of the federal government. It also applies if the loan is intended to be sold to the Federal National Mortgage Association, the Government National Mortgage Association or the Federal Home Loan Mortgage Corporation. Last, it applies to loans made by a creditor as defined in the Consumer Credit Protection Act.

Under the federal act, the buyer at a foreclosure sale will take the property subject to the rights of a bona fide tenant. Those rights can be terminated on 90 days’ notice, but only if the tenant is holding without a lease or with a lease terminable at will, or if the purchaser intends to use the residence as the purchaser’s primary residence.

So if you buy at a foreclosure sale and there is an existing tenant under lease for a year, you will not be able to remove that tenant before the end of the lease term unless you intend to live in the residence yourself. A bona fide lessee will not include the borrower, the borrower’s child, the borrower’s spouse, or the borrower’s parent. Nor will it include a lease for substantially less than fair market rent. Nevertheless, this could pose a substantial obstacle to you if you plan to buy a foreclosed residential rental property.

Oregon law

But it doesn’t stop there: there are a number of Oregon laws that were passed in 2009, which also protect tenant rights. Under House Bill 3004 and Senate Bill 952, the purchaser at a foreclosure sale must give the tenant 30 days’ notice before evicting and that notice cannot be given more than 30 days before the first date set for the sale. However, the tenant can obtain a longer time period for notice.

If the tenant gives the trustee under the trust deed a copy of the rental agreement or lease at least 30 days before the first date that was set for sale, then the purchaser at the foreclosure sale cannot commence a foreclosure until 60 days’ notice has been given to the tenant.

But, if the tenancy is month-to-month or week-to-week, and the tenant gives notice of the rental agreement to the trustee not less than 30 days before the first date set for the foreclosure sale, then the tenant is only entitled to 30 days’ notice before an eviction.

However, even if the tenancy is for longer than a month-to-month term, the purchaser may be able to remove the tenant on 30 days’ notice, if the purchaser intends to occupy the residence as the purchaser’s primary residence. So it is critical for any purchaser to ask the trustee if any notices of existing leases or rental arrangements have been provided by tenants.

More requirements

House Bill 3004 adds a requirement that a trustee have a website to post true copies, or links to true copies, of amended notices of sale. Oregon Senate Bill 628 modified the warning notice to require that information on how the borrower can consult with a housing counselor and get information on federal loan modifications is included. Also, it must provide a deadline for submitting a request for a loan modification and places timing burdens on the beneficiary to review the application in good faith and respond.

Senate Bill 239 requires filing an affidavit of the service of the notice with regard to loan modification programs. And if that notice is not sent, the grantor of the trust deed will have the opportunity to redeem the property.

Oregon Senate Bill 952 now adds a requirement for a notice to tenants to advise them of their risk of being forced to move out and of their right to notice and other rights. It is not clear what effect a failure to timely give this notice will have.

The message of the new federal and state statutes is that the road to acquiring residential rental properties through foreclosure is a dangerous one. It should not be traveled without carefully reviewing not only the status of the property, but the terms of the tenancies of all of the occupants and the notices that were sent out in connection with the foreclosure.

It is no longer possible to simply serve all tenants with foreclosure notices and eliminate their rights at the sale. There are many traps for the uninformed. We can help you each step of the way.