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Lease Foreclosure?

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Posted On: 02/04/2009

Q: I've read that when rental properties are foreclosed that tenants are often thrown out, even if they have a lease. Wouldn't it be better for the new owners to let the tenants stay on?

A: When a home is foreclosed title to the property is changed and arrangements with the old owner come to an end. The new landlord, typically a lender or investor represented by a REO department (real-estate owned) or a default servicer, now owns a property. That's a problem because the last thing lenders want is to be in the real estate ownership business.

The goal of the new owner is to unload the property as quickly as possible. Typically this has meant asking the tenant to leave or seeking an eviction order so that the property is empty and thus easier to fix up and sell. The result is that tenants are tossed out even if they have lived at the property for many years, made all rental payments and taken good care of the home.

The presumption has been that the tenant should leave because the property can quickly be re-sold, say within 90 days. However, in a number of local markets the foreclosure inventory is huge and quickie foreclosure sales are no longer likely. For this reason some lenders and default servicers are now more open to allowing tenants to stay.

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If you're a tenant in a property that has been foreclosed there are some steps to take.

• Contact the new owner. Would they like you to stay on? Point out that if you can stay the lender gets rent plus someone in the property to prevent vandalism. Also, in today's world it might be easier to re-sell an occupied property rather than an empty one to an investor.

• Check state and local laws. Is the lender required to provide notice before eviction? How many days? If you're in an area with rent control are there any rules that apply in your situation?

• Will the lender pay any of your costs to move? Some lenders will do this under the theory that such payments hold down damage to the property.

For details speak with local community housing agencies or a real-estate attorney.

Q: Does anyone have any idea how many foreclosures we can expect in 2009?

A: Speaking in November, Sheila Bair, head of the Federal Deposit Insurance Corp., said "over the next two years, an estimated 4 to 5 million mortgage loans will enter foreclosure if nothing is done."

Bair has been a proponent of mass mortgage modifications, the idea that it's cheaper for lenders to modify toxic loans than to foreclose. She has developed a loan-modification program for owner occupants that have been used with IndyMac, one of the many failed banks taken over by the FDIC. The result as of this writing is that more than 5,000 delinquent borrowers have refinanced.

"These efforts," says Bair, "have prevented many foreclosures that would have been costly to the FDIC and to investors. This has been done while providing long-term sustainable mortgage payments to borrowers who were seriously delinquent. On average, the modifications have cut each borrower's monthly payment by more than $380 or 23 percent of their monthly payment on principal and interest. Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country."

Q: Do I still need a home inspection for new construction given the slow-down in home sales?

A: Yes. The pace of local home sales has nothing to do with condition. Whether you're buying a new home or an existing one you should get a professional home inspection. No less important, your transaction should be dependent on a home inspection by an inspector of your choice, which must be "satisfactory" to you. If not satisfactory you get your deposit back. Speak with your broker or attorney for specifics.

Q: Our house is the biggest and best in the neighborhood. Doesn't that mean it should sell quickly and for at least list price?

A: There's nothing saying your property cannot sell quickly or for a good price, but the odds are very much against it. Here's why: The usual rule is that buyers seek the least expensive home in the most expensive area they can afford and your property does not fit the "least expensive home" profile.

Why are less expensive homes in demand? The pool of buyers becomes smaller as home prices rise and financial requirements increase, thus there are simply more potential buyers for homes with lower price tags.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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