Short Sale with Tenants

Copyright(c) 2009 Deanna & Jim's GOLD Team, RE/MAX Olympic

         Sometimes an investor faces changes in circumstances the make it difficult to continue paying mortgage payments on tenant-occupied rental property.  Diverting the income stream from the tenants to other purposes for even a short time often has the effect of triggering potential foreclosure.

         If the difficulty in making the payments stems from the tenants not paying timely then eviction and replacement with more dependable tenants is, of course, in order.  Assuming this is not the case the question arises as to whether or not it might be possible to avert credit damage due to foreclosure by attempting a short sale with the tenants in the property.

         Selling a tenant-occupied property is challenging unless the tenants are already planning on moving, happy to be moving, and cooperative.  If the tenants don't want to move they are unlikely to cooperate with access for showings and having the house show well (who can blame them?).  The sooner it sells the sooner they have to move!  

         Negotiating a successful short sale transaction will require showings to multiple buyers to generate an offer, then further access for one or more broker price opinions or appraisals for the seller's lienholders, then further access for the buyer's home inspections, termite inspection, HOA/Condo association inspection, and appraisor.

         Due to changes in US law effective in mid-2009 tenants not related to the seller, in possession of a valid lease at market rental rates, are entitled to continue to occupy through the end of the lease if the property is foreclosed.  The only exception is if the foreclosing bank sells the property to an owner who wishes to occupy themselves and even then the new owner has to give the tenants 90 days notice!  So, the law actually is on the side of the tenants in the event of foreclosure.  In addition a foreclosing bank may offer the current tenants a significant "Cash For Keys" incentive to move before the end of their lease.  Tenants have often heard of these payments and will often actually prefer foreclosure so they can get their hands on this extra cash.

       Due to these considerations, attempting short sale of an investment property occupied by tenants is unlikely to succeed.

(As always the key to success in any potential real estate transaction is working with an experienced local team of agents who have handled situations like yours before.  Deanna & Jim's GOLD Team has handled both buyer and seller sides of many, many short sales, over 150 bank-owned sales, and over 350 total transactions in Northern Virginia area centered on Manassas and Prince William County in the last 8 years.)