Buyer Beware: Foreclosures of Properties with Existing Tenants

Harmony Taylor

The housing market is hot in much of North Carolina, and many local and out of State investors are on the lookout for foreclosure deals that they can turn into quick rental income. In this situation some investors may be inclined to forego traditional due diligence, but they do so at their peril. No investor wants to purchase a property, only to learn after the fact that there is an in-place tenant (often less than desirable) who has no intention of leaving the property or paying reasonable rent. In this situation, the tenant may have more rights than the property owner would think.  Prior to December 31, 2014, the Federal Protecting Tenants at Foreclosure Act of 2009 afforded tenants certain rights to remain in foreclosed properties post-sale. This Act expired, but North Carolina, like many states, adopted its own version with N.C.G.S. 45-21.33A, Effect of foreclosure on preexisting tenancy. N.C.G.S. 45-21.33 protects tenants in single family residential real property with existing leases from removal by purchasers who do not intend to occupy the property as their primary residence, if certain conditions apply:

  • The tenant is not the debtor under the foreclosed note, or their child, spouse or parent; and
  • The lease is in writing, not terminable at will, and requires that the tenant pay rent that is not substantially less than fair market value (unless subject to a federal or State subsidy).

The first criteria is designed to prevent someone from leasing property to themselves or immediate family members when faced with foreclosure. It may or may not be clear if the lessee is immediate family, and the new owner may need to undertake some investigation to determine if a family relationship exists. The second criteria is clearer, and the new owner can look at comparables from the immediate area to determine if the lease is for fair market value rental.  Real estate agents can help owners pull information from the MLS (Multiple Listing Service) to quickly compare rents for similar sized homes in your area.

If an owner determines that a lease is not protected by N.C.G.S. 45-21.33, they should move quickly to terminate the lease and provide notice of such termination to the tenant. The wheels of justice move slowly, and the sooner an owner/investor removes an underpaying tenant the sooner they can turn their investment property into rental income.

Author: Harmony Taylor
Articles have been Reprinted with permission from Black, Slaughter, Black.

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