A Newbie's Sophmore Year Part IV

By
Real Estate Agent with Berkshire Hathaway HomeServices NE Properties

The Subordination Clause and the Lease

In Waterbury, CT we have large families with small incomes so when a 6 bedroom colonial came on the market for $1200/mth, my clients, against my better judgement, rented it.  I say against my better judgement because the current tenant had nothing good to say about the landlord, who she claimed never fixed anything and my clients would have to provide their own appliances.  I described the situation to my clients as all the headaches of home ownership without the equity.

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While going over the lease provided by the listing agency, we came to a subordination clause.  I knew what it meant to subordinate debt but I had no idea how it applied to a lease, so I called my friend and mentor who explained it to me.  She said it was a bad clause, and I advised my clients not to sign the lease until I spoke with the listing agent whom I called the next day.  Now this listing agent is the broker's brother and here's how the conversation went:

"I can't have my clients sign this lease with the subordination clause," I told the listing agent.

"What's a subordination clause?"

"It says you get to keep my client's security deposit if the property goes into default.  Is your client in trouble?"

"No, it's just our standard lease," he whined, "what else can we do?"

"We could use a Prudential lease or we can cross the clause off your lease," I offered.

"Just cross the clause out, then."

We did, my clients leased their appliances, painted the house, and moved in.  One week later, the bank showed up to change the locks on the doors and winterize the house.  The bank had no idea anyone was living there.  The landlord, who was in default when he listed the rental, still kept the security deposit but my clients haven't paid anymore rent since February and we are now in the process of negotiating with Fannie Mae, the new owners of this house.

The next step for my clients, who would like to buy the house (I've been working with them for the past 6 months to clean up their credit so they can buy) is to get pre approved for a mortgage by a Fannie Mae approved lender.  After that, Fannie Mae will have an appraiser put a price on the house and if my clients' qualification and the price are close, we can hopefully keep them in the house.  The other alternatives are cash for keys, which is a hardship since my clients have a 1 year lease on the appliances, or they pay rent to Fannie Mae for the duration of their lease.  They did a really nice job fixing the place up - I hope they get to stay.

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