A short sale occurs when the proceeds of the sale of the home are less than the amount owed to lenders. A short sale has to therefore be approved by the lenders. An owner has to prove there is hardship in order for a short sale to be approved . 
It can be difficult for lenders to approve an owner's hardship , at times - especially if it is a rental property.
Challenges and possible solutions to selling a tenant occupied short sale :
An owner may need to sell a tenant occupied property for a number of reasons.
a. The rents may not cover the mortgage payments if adjustable rates went up.
b. The neighborhood values have been declining so he may want to get out of the area.
c. The tenant may not be paying the rent so the owner may not afford to pay the mortgage.
d. The owner may just want to get out of rental business for health or personal reasons.
The owner should first contact the lender and try to have the property approved for a short sale before listing the property. Ofcourse the lender is not obligated to agree to the short sale . As it is an investment property they have stricter guidelines.
Challenge for owner : Example #1. The lease does not expire for several months.
The owner may not be legally authorized to issue a "notice to vacate" if the lease or rental agreement does not provide early termination and / or cancellation clauses. He can however write to inform the tenants that the lease will not be renewed because the property is being sold. It is in the owner's best interest to have their lease /rental agreement reviewed by an attorney specializing in 'Landlord/Tenant ' law in their state, prior to sending out written notices. Landlords and agents should follow State and local laws at all times.
If the property is under a lease agreement , finding a buyer who will wait till the lease expires will be difficult. If the tenant pays the rent on time and has expressed interest in renewing the lease, it is a good idea to try to sell to investors as an investment property with existing tenant. It should be advertised as an investment property in the multiple listing and the rent and expiration date of the lease should be mentioned. Many people buying short sales are investors and they go by cash flow. If the numbers make sense it may be easier to find an investor. It will be helpful if the lender approves the short sale in advance so that there will not be delay later. It may be a smooth transition.
If the tenant does not pay the rent on time and will not cooperate in showings , the tenant should be offered cash to move out. There should be a program similar to ‘ cash for keys' for foreclosures. ‘ Once the tenant moves out, the property should be marketed for sale. The owner will lose rental income when the tenant moves out but this should be considered to be part of the hardship and the investor should not have to make mortgage payments at this time.
If the rental income is not enough to pay the mortgage it will be easy to prove hardship and the lender should consider the short sale without expecting the seller to pay the difference between mortgage payment due and rental income .
Example #2 . If the lease is about to expire the owner should not renew the lease . He should wait until the tenant moves out before listing the property. The lender should be informed of the situation and should approve the short sale because it will be easier to market the home and to sell to a larger pool of buyers if it is vacant. Carla Muss-Jacobs has this to say, “ I scan listings constantly searching for properties that my clients could,conceivably , want to call home. The ‘ Kiss of Death’ when it comes to a showing is : Tenant Occupied. Reason : Showing hours are typically a 24-hour notice. Getting into a tenant occupied property can be a challenge and then we have the nuance of the lease… are tenants going to convey the property upon purchase ? More to the point, do the buyers want to inherit the tenants?” Barbara Todaro writes, “The bank will benefit if the property is vacant because the buyer will probably surface sooner. It’s easier to show and appointments do not have to be coordinated with the schedule of the tenants. Many tenants are not good housekeepers.” Maureen McCabe says that , " it is difficult to show tenant occupied properties but having a tenant paying utilities during a short sale could keep some of the horrible effects of no utilities at a minimum... stuff like mold,burst pipes and flooded basements that greatly affect the value of a property. We should look at it on a case by case basis "
If the tenant does not pay the rent at all the best option would be to evict the tenant and list the property. Selling a
property with a problem tenant will create more problems down the road. The tenant may refuse to move out before settlement.
The lender is going to lose money in a short sale and is not going to like the idea of paying tenants to move out neither will it like not receiving mortgage payments from seller who faces hardships.But approving the short sale may be better than waiting to foreclose on the home.
The incentive for the lender to approve the short sale in advance is that there will be no delay later and no fear of buyers walking out. Also if the property goes to foreclosure there will be a new set of rules to follow. If the tenant pays on time, the lender could make it a condition for the tenant to pay the rent to the lender directly until the property sells, or set up an escrow account where the tenant can pay the rent, before approving the short sale. This will be another incentive.
The Helping Families Save their home Act of 2009 protects rights of renters after foreclosure. The tenants will be allowed to remain in the home for 90 days after foreclosure or through the term of the lease (conditions apply) and there will be other expenses for the bank. This is not yet required of short sales but if the property goes to foreclosure the banks will have to abide by this law.
In most cases it will be less expensive for the Bank to pay the tenants to move out and then go through with the short sale unless the tenant pays the rent on time and takes good care of the property and cooperates in showings, in which case it will be easier to sell to an investor.
This post is a combined effort of Barbara Todaro, Carla Muss, Gita Bantwal, Jennifer Fivelsdal, Maureen McCabe, Tim Kennedy.
In situations which involve Landlord/Tenant law, we encourage owners of property who are contemplating a short sale to seek legal counsel. This post should not be considered legal advice.
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