Advice for renting your home while in foreclosure

[needhelpinnj]

I am gettting ready to file Chapter 7. My reason for filing chapter 7 is because my mortgage payment (with property taxes and home insurance) is $4,000 a month and I take home $6000 a month after taxes. It's also an old house that requires a lot of maintenance (I spent $6500 last year). I just had a baby and now can't afford the mortgage payment anymore with daycare and needs for the baby. I've seen several lawyers and they all tell me I qualify for Chapter 7.

My lawyer encouraged me to rent the house before it forecloses for the next two years. I have never rented a home before and just want to make sure I have all my bases covered. Here is what I understand:

* Be up front with the tenant and tell the situation ahead of time
* The tenant is responsible for exterior maintenance (lawn cutting and snow removal) and their use of the utilities. I also want them to take care of the boiler
* I still pay property taxes and home insurance

Is there anything else I should consider when getting a tenant? Should I consider a property manager? Do I have to pay income tax on the rent?

Thanks for your thoughts and support! This forum is fantastic and I've learned so much from it.

[HHM]

Just get a property management company to handle it.

1. Yes, be upfront with tenants.
2. Be prepared to make concessions on rent if you do that. Tenants being responsible for utilities is normal (except for water and sewer); exterior maintenance, hit or miss, but since you are letting it go to foreclosure doesn't matter. If you were renting long term, you would probably hire a service to maintain exterior and landscape. Boiler, that is probably a non-starter. Interior appliances are generally the responsibility of the landlord. Keep in mind, from the tenants perspective, the benefit of renting is that they don't have to take care of that sort of thing.
3. Yes, you still pay property tax and definitely want to have insurance (after all, you have already filed BK, any new problems will be post BK and you will be liable)

Also, yes, the rental income is income for tax purposes. You are essentially running a business so you will have income and expenses.

At the end of the day, you really need to run the numbers and ask yourself whether it is worth the hassle and headache to rent.

[HighUnder]

If, after you run the numbers and decide to rent it out, PLEASE let a management company handle it. And please research and look for a reputable, highly recommended management company, as they are NOT all created equal. This is especially important with a home that you already know requires a lot of maintenance. Best of luck with this.

[needhelpinnj]

Thanks HHM and HighUnder for your input. I am NEW at being a landlord or even considering this. My lawyer thinks that I could get $2000-$2500 a month for rent and makes it sound like I'm going to pocket everything except for the property taxes. She also told me that I would not be responsible if the property was damaged from tenants when it's foreclosed by the bank. Is this true?

Here are the numbers. Please let me know if you would consider doing it if you were me. I am open to different opinions and want to consider all options and you might consider things that I have not thought of:

* Property taxes $675 a month (I live in NJ, hence the high cost)
* Home insurance $76 a month (I expect this to go up if I have people rent)
* Income tax - I expect my fed rate will become 28% and my state will be 6.37%. For $2,000, the total is $687 and for $2500 the total is $859

When I look at this, it looks like $1438 to $1610 in costs. Plus the management company, which I don't know how much that costs. Then any ongoing maintenance. The major things for maintenance that could come up are the roof that might need repairs (it's 10+ years old) and maybe some plumbing in the cellar as some pipes are old (I had it priced at $1200).

It doesn't look like a lot of money, however, it would help me to pay for the property taxes and I could keep property insurance. In NJ, I've been told that companies don't insure homes that are vacant at all. Even though I live in a very safe town, I don't want to take any chances.

Also, should I consider a month-to-month lease or signing someone for a one or two year lease?

Thanks for all of your support and helping me to think through this.

[HHM]

She also told me that I would not be responsible if the property was damaged from tenants when it's foreclosed by the bank. Is this true?

That is a little too bold a statement. There is truth in it, but there are also some big "Unless" qualifiers that go along with it. If the damage is normal wear and tear (and even a little worse) then no liability. If the damage is fairly severe and lets say you did not maintain insurance or take reasonable steps to prevent such damage, then the bank can arguably claim negligence. It would be rare if they did, but it is a risk. Bottom line, insure the property if you are going to be renting it out and make sure you understand what is, and is not, covered.

As for leasing, if you are up front about foreclosure pending, then a month to month is appropriate for all parties.

Another thing to consider, if you take a deposit, make sure you understand that it is NOT your money. Also, some states prevent a deposit to be used to offset unpaid rent. If I were a renter about to rent a pending foreclosure, I would probably refuse to pay a deposit.

A good property management company can give you a better sense of what you can collect in rent.

Also, what makes you think you really have 2 years, maybe in NJ the timeline is long (I don't know), but that may be a little optimistically long.

[needhelpinnj]

HHM, thanks for all of the clarifications!

Regarding the two years, I had spoken with six bankruptcy/foreclosure attorneys and they all told me it took two years for foreclosures in NJ. Quite frankly, I don't want the house and if they want it sooner, that's fine with me. A month-to-month lease is great. For the deposit, I'm going to use a bank account and have the bank hold it (I forget what it's called).

[helpmeout]

Why wouldn't you just live there rent free until the bank forecloses and changes ownership? That makes more sense to me. And is what I am doing. This way, you get to save money without the headaches of being a landlord.

And you would have liability for any damage done to the house by the tenant.

[helpmeout]

Also, what makes you think you really have 2 years, maybe in NJ the timeline is long (I don't know), but that may be a little optimistically long.

I live in NJ, and my BK attorney told me at least 2 years as well. In fact, I haven't paid the mortgage in a year. And not one word from my bank yet (knock on wood). I also haven't been paying the property taxes, the bank has as taxes attach to the property not the owner.

[debee]

If you elect to live rent-free you can also get renter's insurance instead of homeowner's. It's cheaper and will cover you and your stuff, but leaves coverage of the structure to the lender. They will get their own insurance (that doesn't cover you) once you stop paying.

[needhelpinnj]

I've already moved out as I've tried to rent it on my own for the past few months. Honestly, I love the house but hate the neighborhood and the town. I've moved in with my boyfriend in a different town and am so much happier. I would prefer to be a landlord than live in this town.

[needhelpinnj]

Helpmeout - You haven't been paying the property taxes? My lawyer told me that I would have to. How are you not paying them?

[chicagoannie]

Helpmeout - You haven't been paying the property taxes? My lawyer told me that I would have to. How are you not paying them?

When my house went into foredosure I stopped paying the property taxes. The bank became responsible for the taxes.

[PushRestart]

Hey NeedHelp, a realtor chiming in here, one of the best reasons to use a prop. mgmt. company to handle your rental is to reduce your exposure to breaking one of many landlord/tenant laws that most new landlords do not even know exist. For example, in Washington state, a plumbing leak must be fixed in 24 hours or the tenant can fix it themselves and charge off the cost of the repairs to you. A competent prop. mgmt. company should know the rules and simply take care of all that stuff for you. Typical fees up here are 8-10% of the monthly rent to run the whole thing for you. Asking the tenant to cover utilities makes sense but taking care of a boiler is not usually something a tenant will want to do...

[debee]

Helpmeout - You haven't been paying the property taxes? My lawyer told me that I would have to. How are you not paying them?

I second/third what helpmeout & annie said: Property taxes attach to the land. The county gets a lien when the bill's not paid. The bank has to pay the lien first from any foreclosure sale proceeds. So long as the debt has been discharged in bankruptcy, the lender can't pursue the former owner for any deficiency caused by the tax bill they had to pay.

[HHM]

Let's back up and clarify the property tax issue...as there are two issues here, one related to BK, and one related to Foreclosure.

Any property tax that becomes due AFTER the filing of BK, is the responsibility of the present owner of the property. So, the taxing authority CAN harass you to pay property tax. However, as a practical matter, the remedy for unpaid property tax in most states is a lien on the underlying property. When the property eventually forecloses, the foreclosing bank must satisfy the property tax (so that way the bank can pass clear title). So, net result, you needn't pay the property tax but you WILL be harassed for the collection of any property tax that comes due AFTER your bankruptcy filing date. And if your state allows personal judgments for unpaid property tax, they can go after you.