Purchasing a foreclosed property or REO, only to find out the property is tenant-occupied or worse, inhabited by squatters

California lawmakers have always had a deep-seated dislike and aversion to sophisticated corporate landlords with the resources to gobble up properties. We were encouraged that a state law leveled the playing field for smaller investors competing against the big fish at foreclosure auctions. Specifically, SB 1079 prohibits multiple homes from being bundled together at auction and sold to a single buyer. Rather, they must be sold individually. 

As we told Mercury News, “Individuals who have a little bit of money can come and play in a way that normally you would not be able to.” Read the article here »

The concern we have is that when a foreclosed property goes on the auction block, investors don’t know what they are getting into. 

Buyers in the market may be overexuberant in purchasing a property on the cheap, only to discover that they are limited in how much they can raise rents and cannot evict the tenants without just cause. 

Of course, when eyeing a property, would-be purchasers must understand the rent and eviction controls in the city where the property is located. If not subject to more stringent local tenant protections, the property may be covered by statewide rent and eviction controls. Just because there is a new buyer, tenants in the foreclosed property are not stripped of their protections. Whatever rent amount they are currently paying remains intact. 

This raises the question of what rent the tenant is currently paying and this should be easy to ascertain, right? Not always. Unable or unwilling to produce a written lease, tenants have been known to lie about what they have been paying the previous owner, and it’s difficult for the new owner to disprove that figure. Remember, the last owner just lost their property; they are disgruntled and it’s likely that they will not be friendly to someone who just scooped it up at an auction. Yet it can get worse. 

If the previous owner of a duplex failing to make mortgage payments is devious, there is nothing to prevent them from putting their two kids into each unit for the abysmally low sum of $400 a month. And the new owner inherits this rental relationship. 

The point is that the buyer who has the winning bid may be in for a disappointing surprise when they learn that they cannot freely use the property as they desire when there is a bona fide tenant occupying the property. 

So how to discover if the foreclosed property is tenant-occupied? 

This can be tricky. Foreclosed properties sold at auction are offered “as-is”, with no guarantee with regard to the property’s condition or occupancy status. 

This is not to say that when a potential buyer is seeking to purchase a foreclosed property, they cannot do their own due diligence, whether through accessing public records, driving by the property, talking to neighbors, etc, The aspiring buyer has no right to inspect the interior of the building, but they can get a gut instinct on who is living there. 

In a foreclosed or bank-owned property, the former owner will oftentimes linger around. 

When an owner loses their home, it doesn’t necessarily mean they willingly vacate. If the buyer encounters an adamant person who refuses to leave, a 3-day Notice to Quit should be served and if the previous owner or their family members are still occupying the premises, the right to evict them has been perfected. Remember, they are not tenants. 

Some of our soliloquy. 

Bornstein Law always likes to assist enterprising owners in thinking strategically about their purchase decisions and understand all of the numbers and repercussions of buying a property before they take the plunge. 

Importantly, the potential eviction costs, delays, and/or relocation assistance payments should be considered in your bid calculations. Buyers who think they are getting a bottom-barrel deal may find that the upside potential of the property is limited when tenants are in possession. But it doesn't end there. 

Foreclosed homes are often a magnet for squatters that will have to be removed. Before submitting bids on a property, some aspiring owners will hop fences to identify telltale signs of squatting and drug activity, only to be shocked at what they witness.

In another account, a potential buyer had the fortune of discovering an unoccupied property. He hired someone to go to the foreclosed property and work on their car in the driveway, be it changing the oil or doing a brake job - anything that took a few days so that competing buyers would falsely believe that someone was living in the property.

The new owner must pay a title company to do a preliminary search to see if there are property taxes due, liens, pending lawsuits, and so forth. According to one investor in Alameda County who was actively purchasing foreclosed properties from 2008-2012, he was forced to do an Owner Move-in Eviction that took more than a year and cost six figures. We can go on.

Buyers who are lured by the appeal of buying properties cheaply can be quickly deflated. In the words of one client, "the business is sketchy" and not for the faint of heart.