November 25th, 2006   5:23 pm

Renting a House in Foreclosure

Many of you have told me to rent out my vacant houses while I’m trying to sell it, since I still have a couple of months before foreclosure process runs its course. I can rent it month-to-month for a discounted rate and fully disclose my situation to the renters so there are no surprises.

I’m not paying the mortgage so why not collect some cash, right? I’ve though about it but here are the issues I see with renting a house in foreclosure while trying to sell it:

1. Harder to show. Showing/marketing the house will be much harder when it’s occupied. I have to do the 24-hour notice thing and schedule showing appointments. The buyers right now are picky/flaky and I need to be flexible to accommodate their schedule. Also, buyer’s agents love vacant houses because they can show it anytime using the realtor lockbox.

2. Messy House. I will have to deal with tenant’s stuff and their messes. I can’t expect them to keep it in show-ready condition all the time. I will not be able to stage the house for maximum appeal. This will decrease my chances of selling it because I’m competing with so much inventory right now. The buyers are picky!

3. Easy for Tenants To Take Advantage of Me. What keeps the tenants, knowing my situation, from stopping to pay rent, refusing to cooperate on showings, thrashing the house and refusing to move out?

I will collect their security deposit + 1st month rent and and may never see any more money. Then, if I do manage to find a buyer I will have to try to evict the deadbeat tenants. In California that can take a long time and lots of $$.

I know all about deadbeat tenants…

I had my first experience as a landlord back in 2002 (I was 19) when I bought my first property. It was a 3 bedroom 2 bath condo I bought for 100K to use as a primary residence. It needed some cosmetic work. I fixed it up myself with my dad’s help and lived in it for almost a year.

Then I decided to quit my full-time web development job and do freelance website design and run a hosting company. The business didn’t take-off like I hoped and I couldn’t afford to pay my mortgage anymore. So I moved back in with my parents and rented the condo out.

I made every land-lording mistake in the book. I rented to a friend and his family and didn’t check their background. I found out later that they came in straight from an eviction right into my condo. I did collect their employment and rental history but I didn’t actually call to verify anything. I figured if they are providing the info, they have nothing to hide. How naive!

The only money I ever saw was the security deposit and first month’s rent. It was a different story every time for the next two months.

Long story short, I decided to sell the condo and buy them out. It was cheaper than trying to evict and continuing to make mortgage payments with no rent coming in. I offered them cash (which I borrowed from a friend) to move out within 2 weeks. They did.

The market was heating up in 2003 and I sold the condo for a $35,000 profit. That more than covered my tenant problems and I never missed a payment! This time around the market is not going to save me.

Yeah yeah, I know. I can thoroughly screen the tenants and all that good stuff. But I don’t have the luxury of time and money to be doing a lot of advertising and screening.

And think about it… What kind of a tenant is likely to rent a house from somebody who is in foreclosure and will be loosing a house in a couple of months? A fly-by-night type of a tenant, most likely.

Or should I just rent the houses out to whoever, collect as much money upfront as I can, let the houses go to foreclosure and let the bank deal with it? That’s not right!

26 Comments

  • Casey,

    Don’t forget about equity skimming as another of the potential problems with this plan.

    When you take rent payments and fail to pay the mortgage, you can be prosecuted for equity skimming.

    Don’t take a bad situation and make it worse.

    I wish you luck on your situation,

    William

  • The Man:

    I think what Casey might have meant is “rent skimming.” I’m not saying this is or isn’t rent skimming, but it’s a bit different than “equity skimming”

    Additionally, rent skimming is using revenue from the rental of residential real property at any time during the first year after acquiring the property without first applying the rent (or an equivalent amount) to the mortgage payments. California’s anti-deficiency legislation does not apply to a claim for rent skimming.

    You can read the whole passage in context at:
    http://www.gersonlaw.com/non_recorse.html

  • Renting any place out at this point would involve incurring a lot of exposure without much tangible benefit. Anyone who would be willing to rent from you under these circumstances isn’t a tenant that you want.

  • Original post: Renting a House in Foreclosure by at Google Blog Search: house in foreclosure Blog tag: House in foreclosure Technorati tag: House in foreclosure

  • Starting post: Renting a House in Foreclosure by at Google Blog Search: house

  • Depending the servicing agent of the Non performing Loan and the standards in which they find grounds to establish fraud, again both answers were right, with the exception of it being Federal and State laws are no longer applicable, especially in multiple or more than one occasion.

  • 7. Adult Supervision
    November 26th, 2006 at 6:53 am

    You’re missing the point again.

    Very few have said rent them now, during the endgame.

    Most said rent them months ago to help avoid getting into this situation.

    You remind me of my son while a teenager - he always had a (poorly thought out) reason (excuse) why he couldn’t/shouldn’t do something. He is one of those people who just can’t learn from observing the mistakes of others and had to learn from making them himself - you are like that.

  • Starting post: Renting a House in Foreclosure by at Google Blog Search: house

  • Here’s another reason you can’t rent. By stating on your loan application that this is an owner occupied home, you can’t rent it out for at least the first year. If the lender finds out you are renting it, they can call in the loan. Of course, given how far behind on payments you are, I don’t see how generating some income will hurt.

  • You can believe it can’t be done if you like, but I can tell you I knew several people in the early 90’s who did it and money. For some this was actually their main investment strategy: (i) Buy a property where the mortgage exceeds the value (which was, like 90% of the stuff on the market) using a shell corporation, subject to, for a small downpayment, (ii) Continue to operate the property in such a way as to maximize cashflow, taking the cashflow through a seperate corporation as “management” or “maintenance” charges, (iii) threaten the lender with chapter 11 while trying to negotiate for either a loan modification or a short payoff. In some (very rare) cases the lender actually agreed to lower the interest rate or discount the principal to a point where the property would generate cash flow.

    Many tenants prefer a month to month lease, as they can move out whenever they wish. The flip side is they can be kicked out with a 30 day notice.

  • I simply cant believe the time you spend on this site rather than getting yourself out of this mess.

    You were approving messages at thanksgiving day dinner at your in laws. UNBELIEVABLE.

    The rest of the houses are all going to be foreclosed on because your an idiot. I hope you go to jail.

  • Can I live in one of your houses rent free until it is foreclosed on?

  • 13. No War for Heavy Metal
    November 26th, 2006 at 6:40 pm

    I agree with all of your points. It’s way too late in the game to rent anything out. A few months ago you could have maybe rented out a couple of the ones you really wanted to try to save and chalked off the rest as a loss, but not now. I know you want to avoid bankruptcy, but your flip-flopping and general reliance on others to fix your problems is about to force your hand.

  • I don’t get it…

    I agree with ‘Adult Supervision’ those are all a bunch of excuses. I have friends that are good at making excuses and when it comes down to it, the only reason to do that is to avoid doing any actual work. Its called … wait for it… Learned Helplessness.

    1) Yes, the house would be slightly harder to show… however, how many people are viewing the house per month? 2?? Not many I would imagine, so this point is moot.

    2) Yes, the house would be slightly messier, but … see (1).

    3) When you are a landlord… you have to deal with bad tenants some times, but they are the minority. Do you want the money? Or do you want to shoot yourself in the foot and sit there in foreclosure? Also, that’s why you have insurance (just make sure your insurance company knows tenants are living there), if the house gets trashed, the insurance will cover it.

    As far as the banks go, there’s no law stating that you can’t rent your property (unless you said they would be owner occupied, in which case you’ve committed fraud). So, rent them out, get the money, make sure the bank knows they are occupied by tenants, and then it’ll be their problem to evict them.

    I’m not sure how the laws are written in the US, but in Ontario, if the new owner of a property intends to live in it (for real), they are allowed to force the tenants out within a reasonable time-frame with written notice. The only time you run into a problem is when you are kicking out bad tenants (for damage, or missed payments) because then the courts get involved.

    NG

  • rent) with a combined value of over $2 mil. He did this by taking out over $140k in credit card debt, lied on his loan applications, and put no money down. He is now suffering the consequences. Anyway, I just wanted to post a quote from one of his blog posts that struck me as funny. I have to admit that when I first read it, I felt a hint of jealousy, but quickly snapped out of it for obvious reasons. He is talking about potentially renting out one of the houses that is being foreclosed:

  • casey you continue to boggle my mind with your idiocy. keep it up. you truely are amazing in your stupidity.

  • Casey,

    You state that you are broke and that you don’t have the time to screen out good tenants and that is why you are not renting those houses.

    Let’s see, at a very cheap price of say $1,000.00 bucks per house plus say another 1k in deposit, with your 6 houses that would yield you $12,000.00 at a minimum.

    Yet, you spent time blogging here instead of going after that 12k.

    You are also worried about tenants committing fraud against you - not paying future rents. Casey, you started the FRAUD against multiple Banks and Insurance companys. Now you are worried that others will do to you what you did to others?

    Typical immigrant thinking.

  • Casey, you started the FRAUD against multiple Banks and Insurance companys. Now you are worried that others will do to you what you did to others?

    So if I mug somebody, I should not be worried about someone mugging me?

    Typical immigrant thinking.

    Sadly, yes this kind of thinking is all too typical.

  • I do see your concerns about renting, but believe that you should find a way to do it if possible.

    Ideally, you’re trying to avoid bankruptcy. To do this, you’re going to need as much money as possible, and renting out these units is a legitimate way of making some. Granted, the amount of money that you’re going to bring in will probably not give you a positive cashflow, at least you’ll lessen the burn. Of course this will introduce problems, but they may not be worse than the ones you’re already dealing with.

    If you think you’re going to declare bankruptcy in the future, I don’t see why you don’t just do it now.

    Do you have any idea what the market rents are for each of your remaining properties?

    -Landlord Shmandlord
    http://landlordshmandlord.blogspot.com/

  • OK I just found this site…. this guy is for real?

  • Casey -

    Are you paying rent yourself? I’m assuming not. Even you would have the good sense to MOVE INTO the house in Sacto, rather than pay rent to someone, right? Right?!?!?

    Maybe there is some complicated RE finance stuff I don’t understand (having never faced forclosure or owned 8 homes, I certainly can’t claim to know the details), but it seems dumb to let that house sit empty.

    (BTW - as soon as I see anything approaching common sense from you, I’m planning to donate to the on-line tip jar. Say…..100 bucks. Its very odd, though - the lack of common sense is what makes this site so addicting, but its also what has kept me from donating to date. Same reason I don’t buy crack for crack addicts.

    I’m a huge critic of easy credit, and think that the CC companies and Congress REALLY did the world a dis-service with the bankruptcy reform stuff last year. You are quickly making me lose sympathy for the consumer of said credit, however. I just hope the laws do a good job distinuguishing bentween predatory consumer credit/lending and simple fraud/idiocy/greed, so folks who have been screwed - on both sides - get what is coming to them.

    Oh, and maybe you should use the house in Sacto to throw rent parties, at the very least. Or, maybe you could collect donations TOWARDS the party on your site. I’d kick down 50 bucks. Then, when you get, say 2500 in donations ear-marked for the party, you can spend a few hundred of it throwing the party - lets put that house to use! - and the rest to pay down some debt. I’d certainly attend - and pay ANOTHER 10 bucks to get my picture taken with a true RE mogul/internet celeb.

    Actually, a cousin of mine did something very similar back in the stoneages (1980s). Bought houses ‘no money down’ in the town where he went to college and then rented them out. For any house sitting empty, he threw mortgage parties once a month. Hired a band (or let a garage band play for free), bought a few kegs, charged a few bucks at the door.

    But, I digress…..

    Thanks for the web-site. Terrific stuff. Needs a porn factor, but otherwise pure genius.)

  • […] Anyway, I just wanted to post a quote from one of his blog posts that struck me as funny. I have to admit that when I first read it, I felt a hint of jealousy, but quickly snapped out of it for obvious reasons. He is toying with the notion of renting out one of the houses that is being foreclosed: I’m not paying the mortgage so why not collect some cash, right? […]

  • Casey:

    Most loan contracts have an “assignment of Leases and Rents” clause.

  • this can’t help but have their every-day decisions, and especially their investment decisions clouded by negative thoughts and feelings.  It is very unfortunate.  I suggested that Casey Serin is suffering from a form of learned helplessness.  In a post , Casey was asking whether he should rent out one of the many homes he owns that are facing foreclosure.  However, after posing the question, he went on to describe many different reasons why the idea was not good, and none of the benefits of renting

  • HOLY CRAP, you have not learn anything. What makes you think you can be successful as a landlord now.
    You really f…. being a “real estate investor”….and you have no right calling yourself that.
    You just need to take your hits and call it a day.
    By the way what seminar was it that gave you the idea to go out and start goobling up real estate like there’s no tomorrow…with a credit card to boot.
    Very DUMB…
    There’s something to be said for being a risk taker but this isn’t one of them.
    Good luck you’ll need it

  • You are all a bunch of money hungry greedy f…cks! Driving around in your leased BMW’s with the little ear piece from your phone cramed in your ear (all while cutting off three lanes of traffic).You all went to weekend real estate seminars right? The one with the twin midgets maybe? Real estate investors are like a plague to the great state of California.California real estate is f..ckin over rated anyway. You can all take your little phone ear pieces that you make all your big money deals with and insert in it your rectums! Thanks… Poor Average Joe