In August of 2007, I posted an article about this. I went back today and re-read it. It's funny how views change (even my own) over time, isn't it? At that time, we had only had a handful of the properties we manage go into default. We would "play it by ear" on whether or not to cancel with the owners.
We had (notice the past tense) an office in the Antelope Valley of SoCal. We were up to about 30 properties under management out there when the perfect storm of foreclosures hit. I am not going to write about the storm because we have enough reading material about that topic. What I will tell you is that within about 4 months half of them were well on their way to foreclosure.
We found ourselves in a position where we had to make some decisions. Do we keep the office up there open? (We didn't). Do we hold onto the accounts? (We don't). What about the renters? Well, I believe in transparency when it comes to the relationships we have with our owners and with our residents. So, here is where we ended up:
When a renter is living a property that we manage and the property goes into default (that is, an NOD has been filed which classifies it as pre-foreclosure), we cancel the agreement with the owner and give the tenant their full security deposit back.
We really struggled coming to this decision. I mean we really struggled. After all, where did our agency lie? Well, what we did was have owners sign an addendum to the management agreement (which is the contract between us and the owner) stating that they understood our policy and agreed with it. We cut and pasted the section of the California Civil Code that details "rent-skimming".
What we found was that the owners who were planning on going into default but wanted us to find a good resident for them decided not to list with us. It turned out to be a great decision. Our agency relationship with the owner was dissolved by mutual agreement, and we were free to pursue a relationship with the tenant.
In my post from nearly two years ago, I said in the comments that this issue was going to be relevant to property managers for the next few years. It has been and continues to be.
We believe that what it really came down to was "what's the RIGHT thing to do?". Once we had decided, it was just a matter of execution.
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