My company does alot of property management. I have had several investor clients who have let their property go into foreclosure. Often, they have not even notified me or consulted with me about their circumstances and we found out when the tenant received a default notice and they call upset. The result is usually a lost tenant, no matter what we tell them about the lease contract they are obligated to they often get upset and start looking for another house. Then we have a house in default that the owner wants us to find another tenant for. At this point we must tell them that we will not lease the property to someone else while we know the owner is in default.
There may be significant tax consequences for the investor client that loses his property through a foreclosure or short sale. THe investor may still owe Capital Gains Tax, tax on Cancellation of Debt(COD), and/or tax on the recapture of depreciation deductions taken on the property. You can view the tax consequences on http://www.IRS.gov.
One example is, if you borrow money from a lender and the lender later cancels or forgives the debt, they are usually required to report the canceled debt to you adn the IRS on a 1099-C, Cancellation of Debt. There is also the fact that investors depreciate an investment proeprty over a certain number of years. When sold under a short sale or when foreclosed the investor could still be subject to capital gains tax, or tax on the recaptureof his depreciaiton deductions. These are certainly items one might want to consider telling an investor who is in default.