What happens to tenants when their landlord fails to make the mortage payment?  One of my clients is learning the answer to this question the hard way.  He's living through it. 

Let's back up two years to March 2006, when I rented a nice 4-bedroom colonial in Bowie, Maryland, to Tom and his family.  After two years in a townhome, this family of five was no less excited about their new home than any homebuyer.  This wonderful home gave them a yard, a home office, a playroom, and an updated kitchen.  The commute to work was shorter, the schools were good, and they could enjoy the security of a long-term lease.  It was a home they imagined living in forever. 

Forever was their dream.  Former home-owners themselves, they couldn't buy now without first resolving some issues of their own.  The landlord assured these tenants they would have the opportunity to buy this home any time they were ready.  There was no reason to doubt that - after all, this was a professional landlord who owned several rental properties.  My clients signed a two-year lease, with reassurances they could extend if they were unable to buy the home within two years.

Tom and his family were ideal tenants, always making their rent payments on time and making minor repairs and improvements at their own expense (with landlord permission), such as upgrading light fixtures, thermostat and window blinds.  They always treated the property as their own, feeling confident it would be theirs someday.  Like homeowners, these tenants went through all the normal ups and downs of life (plus a few extras) here in their beloved home.  The landlord and property manager seemed to like them - why not, since they were ideal tenants.

Two months ago, Tom accidentally opened a piece of mail addressed to the landlord - a moment that turned life upside down for him and his family.  It was a letter from the bank informing the landlord that the property, Tom's home, was going to foreclosure.  He called me for advice and we agreed that he should contact the landlord directly - after all, there was a possibility the property manager had pocketed the rent instead of making payments to the bank.  To make a long story short, that was not the case. 

It turns out the landlord's many rental properties were purchased or re-financed during the so-called "good years" with minimum down, using combination first and second trust investor loans.  All these loans were ARMS, all the property values had gone down so the properties could not be re-financed, and this property owner was in over his head.  Tom's "great" landlord was going to lose everything personally, and tenants in all of his rental properties were faced with the unimaginable - losing their homes to foreclosure.  

Make no mistake, tenants are real people, and the lives of many families would be turned upside down through no fault of their own.  They are in the unenviable position "between a rock and a hard place" - with a lease in place that requires them to stay and continue making payments to the landlord; unable to move to another property without losing their substantial security deposits.  They are faced with having to find another home, moving expenses, changing schools, and the time investment any relocation requires.  I can only assume each tenants has endured the stress and hardship that my client and his family have for the past two months.  My heart just aches for them!

Fast-forward to this week, when my client's home went to auction.  Niether the landlord nor property manager ever notified him about this, but he did receive a letter from the trustees about a week ago.  Tom took off work to attend, hoping an investor would purchase the property and he could simply have a new landlord.  This wasn't the case, after all - the first trust lender placed winning bid, the only bid.  The house was SOLD!  ... Now what?

Investors who were in attendance at the auction told him to "squat" on the property - that he could probably have two or three months there rent-free, until an agent of the bank (probably a real estate agent) shows up at his door and offers "cash for keys", on behalf of the bank   What an unfortunate mess, since there's a good chance an investor will eventually buy this property from the bank and put a "for rent" sign in the yard.  By then, Tom and his family will be living in another home.

There are no adequate words of consolation for my clients, and I feel badly for all tenants faced with a scenario like this; and, yes, even the landlords who are experiencing the negative results of loose lending practices in recent years. 

Note:  These are not photos of the actual house or tenant, and I couldn't bring myself to post even a stock photo of a family.  But make no mistake, entire families face this consequence of the ongoing mortgage foreclosure crisis - even if they are great tenants who always pay on time.  Maybe this story will have a happy ending for my clients, after these weeks and months of heartache.  I'll post an update when they get settled into their next home. 

Now, I just have to find them another place to live in the same school district!

RELATED LINK: 

• Foreclosures hurt renters, too
• Renters Can't Escape Housing Foreclosure Crisis
• A Happy Beginning - At Last!