Foreclosing on a rental...what are we in for?

[bkinMA1985]

My hubby and I are weeks away from filing BK and including our four family house (we live on the 1st floor). I'm just nervous as to what the FC process is going to be like in thei sparticular situation. Namely, I'm worried about the FC taking a long time and that we'll be stuck with the utility bills etc. during this time. I understand that if we live there and/or continue to collect rent that we are responsible for the house and this totally makes sense. But what if we rent elsewhere and tell tenants not to give us rent anymore? If the house is still in our name, what are we responsible for? I just want to cover our bases and know what to expect. Anyone have some ideas?

[justbroke]

In that particular situation, I'd be very careful. You have all types of liability issues when there are tenants involved. I would continue to collect rent. I may also save all the rents if I'm not paying the mortgage anymore, in case they try to "assign" the rents. Additionally, your insurance may be less expensive because you are an "owner occupied" multi-tennant. If you move out, you may need to get an additional rider and pay more for insurance.

Did I mention liability and insurance? If I did, let me do it again! Insurance and libability!

How would you be stuck with utility bills? Dies your multi-family building not have separate metering for gas, electric, oil? Okay, I'm guessing, now, that you have a central multi-zone system that's supplying heat/hot water to all the units. Yes, that gets tricky! Again, I'd keep collecting rents since the renters ARE RESPONSIBLE to pay you! Whether to tell them exactly what's going on or not, you will need to be careful and draft a very specific notice that reminds them of their responsibility to pay rent or face eviction.

I can't tell you the specifics of how, when, or even IF the lender will proceed through foreclosure.

Let me mention liability and insurance one more time. You have an occupied building that is in your name. This will be true whether you move out or not and will be the situation until the deed (title) is put into another parties name (the bank or a buyer at foreclosure). You need to protect your interests.

I hope that helps.

[bkinMA1985]

justbroke,

Thanks. I figured insurance would need to remain. We have separate meter for house electric etc. If we move out, how would we get that and the water bill out of our name? Is that possible since there would be noone to switch it over to?

As for collecting rent, we were hoping to save for when its time to rent an apartment. And to be able to afford the insurance etc. until the house is out of our name. Are you saying that they might come back and ask for all the back rent? In that case I'd say we might as well prepare to live in a box on the street. Ugh.

I know we need to let the hosue go, but these types of unknowns are almost forcing me to consider a chapter 13 on a house that is bringing us down. Not good. Is there any hope of getting through this with our sanity in check?

[justbroke]

I think you misunderstand "assignment of rents". If you check your Mortgage (Deed of Trust) documents, there may be a section which allows the lender to collect rents where you are in default. You would know when this happens and I don't think you should be "concerned" but you should know that it is possible. It would not affect you. Literally, they would just tell the tenants to send payments to the lender, not you.

If the multi-family residence is a burden, then by all means discharge it in the bankruptcy. You don't need to keep anything you don't want! The water bill would be TOUGH since I assume it is one bill for the entire unit. As for electricity, each tenant should have their own meter and their own bill for their meter (in their name).

What I'm saying is that until you are foreclosed upon, there are things you still need to provide. When you file, you could "reject" all the leases and force the tenants out, but that would need to be done under your State's non-bankruptcy and tenancy laws. Or, just hire a management company and have them collect rents.

Yes, it does get complex and a good attorney should be able to guide you through this process. I personally may be inclined to stay until foreclosed upon, just so that I can save some money (no rent!) and keep the place running. I don't know how foreclosures are running in Mass., but they are extremely slow here in Florida (1+ years).

[davetedge]

If you haven't already rented elsewhere, I'd consider a different approach: stop paying the mortgage now and continue living there until after the foreclosure sale is complete. By being there you'll also be able to protect that property better.

This requires a certain fortitude since you don't know how long the whole foreclosure process will take. My understanding is that in MA the average is 460 days, so you most likely have 15 months living rent or mortgage free from when the bank starts the foreclosure process.

Also, the "assignment of rents" is something to be concerned about whether you stay or go. Either the bankruptcy trustee can take over the tenants' leases since they are considered part of the bankruptcy estate, or the mortgage company can have payments diverted to them. In the meantime, you're saving money for rent, security deposit, and moving expenses.

As embarrassing as it may be, it's good to let the tenants know what's going on so they aren't surprised when they receive notice from the trustee or the bank. Maybe offer a discount on the rents to help them start to save for the eventual move out.

[bkinMA1985]

Thanks for the info! I'm curious though...if we stay in the house for as long as possible but the rents are being diverted elsewhere, are we expected to pay the outrageous water bill etc.? I hate to sound selfish but if we're expected to pay for everything and aren't reciving the rent money, then that's not going to work out too well for us. We'll be paying insurance, water bill, landlord electric meter etc. on top of repairs and upkeep for the benefit of others which will end up being equivalent to paying rent. Or if we aren't getting rents are we not required to do certain things? I apologize for asking stupid questions but this is so complicated and the unknown is scary. Ugh one of my tenants just came to tell me they blew a fuse. Hate this house...

[nohoneymoney]

Thanks for the info! I'm curious though...if we stay in the house for as long as possible but the rents are being diverted elsewhere, are we expected to pay the outrageous water bill etc.? I hate to sound selfish but if we're expected to pay for everything and aren't reciving the rent money, then that's not going to work out too well for us. We'll be paying insurance, water bill, landlord electric meter etc. on top of repairs and upkeep for the benefit of others which will end up being equivalent to paying rent. Or if we aren't getting rents are we not required to do certain things? I apologize for asking stupid questions but this is so complicated and the unknown is scary. Ugh one of my tenants just came to tell me they blew a fuse. Hate this house...

As I read this you have a business decision to make. Which is cheaper? Stay, don't pay mortgage and collect the rents and pay the other bills including insurance. Stay, don't pay the mortgage, let renters stay for free, pay all utility bills including insurance. Move out, pay rent at new place, don't pay mortgage, get the renters out, pay insurance and minimum utilities. Move out, pay rent at new place, don't pay mortgage, let the renters stay and collect rent, pay expenses including insurance. Move out, pay rent at new place, don't pay mortgage, let the renters stay for free, pay insurance and all utilities. Probably several other options. Key is know the expected cost of your options and pick the best one for you and your family. In the end, this decision, like the decision to file BK, is a business decision. Do the math.

[davetedge]

If the mortgage company or trustee takes over the rents, you're still responsible for the property, utilities, and remain liable for whatever things landlords are liable for. If the leases are up soon you may want to rework them so that the tenant pays the utilities directly.

Now, as you know, the benefit to keeping the house and staying there is that you save on paying rent, and given that foreclosures in MA can take years that's a decent amount of money saved. The income from your tenants in bankruptcy may wind up going to the trustee, the mortgage company or staying with you. If this house is too much of a headache and not worth it, then a short sale or deed in lieu are the other ways out.

This is definitely a tricky situation and finding a good BK attorney with experience with local foreclosure and landlord issues is pretty important. Even better, would be one that's familiar with your mortgage company. I'd also make sure to set a plan for your tenants and where you're going to live before you file bankruptcy. Once you file, you lose control of a number of these choices to the trustee.

[nohoneymoney]

If the mortgage company or trustee takes over the rents, you're still responsible for the property, utilities, and remain liable for whatever things landlords are liable for.

I am not a lawyer but I disagree with this statement. If the trustee takes over the property, then the utilities, upkeep, fixing things that break, trash, etc becomes the responsibility of the trustee. That said, I would still keep liability insurance, as recommended by JB in an earlier post, just to be sure until the title changes. One exception to what I said is the HOA fees, those stay with the person on the title to the property (the debtor) and not the trustee.

But I do agree that a good attorney is needed to be sure. Ours helped us immeasurably. While the trustee never took over any of our rentals, we were prepared to turn things over the trustee and walk away. It would be up to the trustee to contact the tenants and make arrangements for collecting the rent and all the things a landlord does. With the exception of the HOA fees, the trustee can't force you to spend money so s/he can run a rental business. We got an umbrella policy to cover liability for all the properties.