What To Expect In A Post Foreclosure Lawsuit And How To Get Rid Of It Prior To Trial

By the time that a client is on the phone with me, he’s already exhausted every chance at a cash-for-keys deal. The client is usually frustrated, anxious and upset. Why not? The client has put up hundreds of thousands of dollars for real estate that he can’t use or sell because the prior property owner won’t leave. Worse, the prior owner has filed suit against everyone-the bank, the trustee, and the purchaser at foreclosure (my client)-and recorded a lis pendens against the property. Thinking that they have all of the leverage, I’ve seen prior owners demand as much as $80,000.00 to turn over the keys and vacate property that they no longer own and have no right to occupy. Other foreclosed out owners that I’ve encountered have been more base, insinuating that if cash-for-keys isn’t paid they’ll strip the place. My experience in foreclosure litigation since 2008 has taught me that “cash-for-keys” is a euphemism, a polite way to say extortion.

My clients are smart business people. They come to me only when it’s time for the nuclear option. They have found in the foreclosed prior owner one who is desperate, unreasonable, and greedy; a person who is addicted to free housing, bent on dragging things out, and marked my client for a shake down. Before suing my client, the prior owner may have already utilized a credit-busting bankruptcy to delay foreclosure only to later suffer the foreclosure where my client bought. Thus, the prior owner doesn’t fear adding an eviction to his credit report to complete the deadbeat trifecta. I advise that the only way to deal with such a person is to hit him hard, dispel any hope in his mind of benefitting, and begin handing him a series of in-court defeats that will eventually result in him waiving the white flag.

First, get an eviction case going. I have my office serve the prerequisite notices on the prior owner that day. Four days later, I file an eviction case against the prior owner. Second, on the day that I get hired, I set a hearing date for a motion to expunge the lis pendens. Third, I begin preparation of my demurrer to the prior owner’s complaint seeking to have the court throw out the case. Fourth, I have contact with the prior owner or his attorney and withdraw all cash-for-keys deals. This contact may be more symbolic than anything else since it’s unlikely that any such offer is pending at the time. But I make contact anyway to emphasize to the prior owner (or his attorney) that there’s no money for the case and to deliver my lecture that he should be ashamed of himself for filing such a frivolous suit against an innocent buyer at foreclosure.

The way matters are now scheduled where I practice in San Diego, the prior owner’s first citadel to fall is possession. In other words, the prior owner loses my client’s eviction case. Naturally, the prior owner does all that he can to delay the case (another bankruptcy during the pendency of the eviction case is not out of the realm) by requesting continuances, taking the case to trial rather than settling, and staying in the property all the way to lock out. But the sheriff will enforce the eviction judgment and throw the prior owner off the property. Depending upon the prior owner’s degree of obnoxiousness and greed, attending the lock out can be a gratifying moment for both attorney and client. Getting possession is a big victory for my client because he can now start preparing the property for sale or rent so he’s no longer losing any time.

While the eviction case is pending, I also recommend to clients that they periodically check on the property and look for any signs of stripping by the prior owner. If the prior owner is taking out fixtures or otherwise damaging the property, I recommend that clients contact me at once so that I can go into court immediately and obtain a restraining order. Because stripping has become so commonplace during the foreclosure crisis, the courts where I practice tend to be very liberal about issuing restraining orders to stop stripping.

The next loss for the prior owner is expungement of his lis pendens. With the lis pendens gone, my client now has clear title. Coupled with the win in the eviction case, my client has achieved at that point possession and the ability to transfer the property free and clear. The court’s ruling expunging the lis pendens is often followed by a loud hissing noise. This hissing noise is the sound of the air going out of the prior owner’s case. The court’s ruling expunging the lis pendens is a serious blow to the plaintiff because it’s an implied rejection by the court of the prior owner’s case and a foreshadowing of plaintiff’s failure at trial. (See my post regarding lis pendens for a further explanation of this point).

The coup de grace is the demurrer. Recall that the demurrer is a motion that challenges the legal sufficiency of the plaintiff’s complaint. There are some limitations to demurrer that you should know about. First, in deciding the motion, the court is limited to the four corners of the complaint. What that means is that the court will not consider any evidence when ruling on the demurrer. The court only looks at the complaint. The sole issue in a demurrer is whether the allegations of the complaint state a legal claim not whether the plaintiff can prove them. Thus, to prevail on a demurrer, the complaint itself must be defective in its allegations; shortcomings in evidence aren’t considered.

The other limitation is that when the court grants the demurrer it can do so “with leave to amend.” In other words, the court will give the plaintiff another chance to plead his case to see if he can plead a good claim. Thus, it usually takes at least two demurrers before the court will grant the demurrer “without leave to amend” (the ruling that I’m after) which means that the plaintiff’s case is done. However, the court, in its discretion, can allow the plaintiff more than one chance to amend. Thus, it’s possible to be stuck in demurrer hell where you’re winning each demurrer but the court keeps giving the plaintiff chances to amend. The upside to the demurrer, though, is that it’s the fastest (and least expensive) way to get rid of a bad case. In San Diego, civil cases take around fourteen months or so from filing to trial. If my client prevails on demurrer, however, he can be out of the case in about four months.

In my experience, particularly when my basis for the demurrer is the tender rule (please see my post on California’s tender rule), the judges in San Diego don’t allow many chances to amend. In fact, in my cases where I demur on the ground of the tender rule, the judges have only given the plaintiff one chance to amend before giving the case the boot. But each case is different. I’m able to tell after reading the complaint whether my client should file a demurrer.

Some cases may not be good for demurrer because the plaintiff alleges a good claim although he probably can’t prove it. In those cases, I would advise bypassing demurrer for a pre-trial motion called a motion for summary judgment. A motion for summary judgment is the mother of all motions. It’s essentially a trial in writing. If my client wins the motion, he wins the case. And, unlike a demurrer, the plaintiff must prove up his case in writing. The court considers evidence, not just the complaint’s allegations. The downside to a summary judgment motion is that it can get pricey. The upside to a motion for summary judgment is that it resolves the case sooner and prior to trial. Thus, a motion for summary judgment can actually save money in the long run because it dispenses with the need for an expensive trial.

A good lawyer can determine whether to go the demurrer or summary judgment route. I tend the favor demurrer because I want to keep the pressure on the plaintiff and I want to keep handing him losses. Remember, the plaintiff’s strategy is to delay. It is common for the plaintiff, therefore, to be constantly asking for continuances. Plaintiffs in post-foreclosure cases will also try to create discovery disputes as a way to delay. The judges that I practice in front of tend to see through plaintiff efforts to delay in post-foreclosure cases and customarily deny continuance requests and show impatience toward discovery disputes. Thus, by the time of the demurrer, the plaintiff has probably already lost at six or seven hearings and is getting dispirited. I don’t like to give up that momentum so I will recommend demurrer if I see a good ground for it. So, if you are an investor in real estate who has been sued, there are ways to get the litigation out of your hair fairly quickly and get on with enjoying return on your investment.

How To Remove A Lis Pendens From Your Property

If you’ve ever been involved in litigation over a piece of real estate, you know about the dreaded lis pendens. A lis pendens is simply a notice recorded with the county recorder which states that the right of ownership or possession of a piece of real estate is the subject of an existing lawsuit. In other words, the recorded lis pendens is notice to the world that ownership (typically) of a piece of real estate is disputed and that there is a plaintiff in existing litigation who is making claims to the property adverse to the owner of title.

A lis pendens isn’t a lien or mortgage against the property but it can have the same effect. A lis pendens is a cloud on the property’s title. The lis pendens shows up in the chain of title and will show up on a preliminary title report. Practically speaking, the lis pendens ties up the property until it is removed, either upon resolution of the litigation or involuntarily by court order. The law regards a lis pendens as a legally binding notice on any subsequent purchaser of, or lender on, the property. Thus, a lis pendens prevents BFP status. (Please see my post on Bona Fide Purchaser). Therefore, if a person buys or lends against a property that has a lis pendens recorded against it, he does so subject to, and at the risk of, the existing dispute and litigation. So, should the litigation resolve in favor of the plaintiff, the buyer or lender who invested after the lis pendens recorded could find his rights to the property now in conflict with prevailing plaintiff.

You may ask, why would anyone buy or lend against a property with a lis pendens? The answer: they don’t. A lis pendens cripples real estate. If you have one recorded against your property, you want it off, fast. As long as the lis pendens is there, you can forget selling or refinancing your property. True, you may find a wheeler-dealer type who’ll buy your property, or a hard money lender who’d refinance, subject to the lis pendens, but they’ll demand a steep discount or high interest to assume that risk. Why take such a financial hit when you can just have the court order the lis pendens removed?

In the post-foreclosure context, the typical course is that prior owner files his lawsuit to set aside the foreclosure sale. He records his lis pendens on the same day that he filed the lawsuit. If the prior owner is represented by a lawyer, he can record a lis pendens as a matter of right; he doesn’t even have to ask the court for permission. Now what? It’s probably best that you hire a lawyer. The lawyer will file a motion to expunge the lis pendens. In the motion, the lawyer will ask the court for an order removing the lis pendens and for an award of attorney’s fees against the prior owner who recorded it for the cost of bringing the motion.

Although filing a lis pendens is easy for the prior owner, opposing a motion to expunge the lis pendens is much harder. In other words, it may be easy to record a lis pendens against property but it isn’t so easy to keep it there. Once the new owner files the motion to expunge, the law places the burden of proof on the former owner to justify keeping the lis pendens on the property. To keep the lis pendens, the law requires that the former owner show the “probable validity” of his lawsuit against the new owner. In plain language, the former owner will have to prove in his opposition to the motion that he would probably win the case at trial if it ever got there. In effect, the prior owner will have to put on a mini-trial, in writing, sufficient to show the court that his case has such merit that he would prevail at trial. That is a tough burden for the plaintiff early on in a lawsuit.

I always recommend to clients that they get a motion to expunge on file immediately. I usually prevail in these motions and get a nice award of attorney’s fees for my clients as well. There are many advantages to winning a motion to expunge. Prevailing on the motion, obviously, frees up the client’s property. He’s now free to sell it. If the client does sell the property during the pendency of the case, he creates another degree of separation (and another bona fide purchaser) between the plaintiff and the property thereby dealing another serious blow to the plaintiff’s hope of ever getting the property back.

Losing the motion also has a serious demoralizing effect on the plaintiff. Remember, the plaintiff’s burden when opposing the motion is to show the probable validity of his case. Thus, when the court rules against the plaintiff on the motion to expunge, the court is implicitly telling the plaintiff that the court doesn’t think that plaintiff will win the case at trial. This ruling is a tough piece of feedback for the plaintiff and a strong signal to how the court will rule if the case ever comes before him for trial. This ruling can be particularly demoralizing to the plaintiff if his theory of recovery is novel or requires an extension of existing law. In ruling against him on the motion, the court is essentially telling the plaintiff no dice and is impliedly rejecting plaintiff’s theory of the case. Another advantage is that the attorney fee award can act as a bargaining chip or, through immediate collection efforts, as a means to disrupt the plaintiff’s financial life. Losing a motion to expunge can also be a part of a series of losses that the plaintiff suffers early in the case which can further pressure him to abandon his litigation.

California’s Tender Rule And How Investors Can Use It To Defeat Post-Foreclosure Lawsuits

Despite its reputation, California law can be pro-creditor. One example is California’s tender rule. The rule applies where a foreclosed property owner has sued asking the court to set aside the foreclosure sale and return the property to him. (Yes, that actually happens.) The prior owner typically files this lawsuit shortly after foreclosure and before the new owner can evict him. These lawsuits are generally a last ditch effort by the defaulting borrower to further delay the inevitable and to continue living without a housing cost. Unfortunately, the new laws passed in the wake of the financial crisis have given defaulting borrowers more ammunition for delaying, and driving up the cost of, foreclosure, a cost all too often borne by the purchaser at foreclosure.

The tender rule is straightforward. The rule provides that, before a court will set aside a completed foreclosure sale, the defaulting borrower (the one, ironically, now doing the suing) must tender the full amount of the unpaid debt on the loan foreclosed upon before the court will allow the borrower’s case to go forward. For example, let’s say that the borrower owed $500,000.00 on the foreclosed obligation at the time of the foreclosure sale. The court will require the borrower (now the plaintiff in our hypothetical case) to tender the full amount of that indebtedness before the court will even allow the borrower’s case to proceed beyond the pleading stage. The plaintiff can rarely make such a tender. Therefore, the tender rule can often be the early death knell for these post-foreclosure lawsuits.

The tender rule is judicially created. Like most rules evolved from the common law, it’s founded in fairness and practicality. The way that the courts look at it, if a party who has defaulted on a debt wants his collateral back, he has to pay the debt. It would be unfair to allow the defaulting borrower to get his property back for free, particularly where a third party has bought the property at foreclosure and is out the money. The courts consider the rule a practical one because there is no point in the court exercising its power to set aside the foreclosure sale just to put the borrower back in default.

What is a tender? A tender of payment is an unequivocal, viable, offer to pay the full amount of a debt. In short, a tender is an offer to pay in full, in cash, now. In the case of California’s tender rule, the defaulting borrower must allege in his complaint, right at the start of the case, that he can pay the debt, in full, now. This requirement is a real sore point for the defaulting borrower because most cannot allege the ability to tender the indebtedness. If he can’t allege tender of the debt, his complaint is open to attack by the defendants and can lead to the court throwing out the case early on. Since defaulting borrowers must allege their cases under oath, most will not make a false allegation of tender. Therefore, if the defaulting borrower can’t tender, he won’t say that he can, he’ll just lose.

The tender rule has exceptions. For example, if, under the law, the foreclosure sale was void, then the defaulting borrower does not have to tender. Examples of a void sale would be a foreclosure conducted by the wrong trustee or a foreclosure sale held after the borrower cured the default. Another exception to the tender rule is if the borrower alleges that the underlying debt foreclosed upon was illegal or invalid. The court will also not require tender if it would be inequitable to do so such as a case where the trusteee violated the deed of trust in the way in which he foreclosed.

However, tender is the general rule. Thus, it will be the defaulting borrower’s burden to prove that he fits into one of the exceptions. The exceptions to the rule are infrequent, particularly these days where the banks and trustees have finally gotten their acts straight. Also, most problems with the foreclosure process are ironed out in pre-foreclosure litigation so that, once the foreclosure sale happens, it’s probably a good sale. In my experience with the judges in San Diego County, they follow the tender rule and narrowly construe the exceptions. So, if the plaintiff cannot fit himself squarely into an exception, the court will require tender.

The issue of whether tender is required should be raised by the defendants right at the start of the case, most commonly in a motion attacking the complaint called a demurrer in California. In deciding the demurrer, the court will have the opportunity at the start of the case to determine whether tender is required or if an exception applies. If it’s the former, the defendants win since it’s highly unlikely that the borrower can allege tender. So if you’ve bought at foreclosure and have been sued, take heart. There is a way to get rid of the case relatively quickly and without having to lose an arm and a leg to attorney’s fees.

What Is A BFP And Why Should You Care?

I’ve had many clients who buy at foreclosure, drawn to the rock bottom prices and willing to take the risk of purchasing sight-unseen.  Buying real estate at foreclosure since the 2008 financial crisis can be like taking a long walk in the dark, a walk made even longer and uncertain by all of the legal “reforms” that have granted new rights to tenants and defaulting borrowers at the expense of the real estate investor. 

These politically-motivated “reforms” have, in essence, given the defaulting (and foreclosed out) borrower new potential legal grounds for setting aside the foreclosure sale and given tenants new grounds for staying even longer in your property post-foreclosure.  The real result of the politicians’ misguided efforts to appear compassionate toward those who borrowed money and then didn’t pay it back is, not surprisingly, money.  The prior owners and tenants use the legal “reforms” to jack up the price of cash-for-keys deals for the new property owner.   

An ancillary negative effect of all the “foreclosure reforms” is that it has (not surprisingly) lead to an explosion in foreclosure litigation.  As a result, the courts have had to get into the act interpreting these statutes thereby creating expanded grounds for tenants and defaulting homeowners to kick up more sand post-foreclosure.  Needless to say, the law of foreclosure has become extremely complicated. 

Investors can take some relief in the fact that the courts, with a couple of exceptions, have towed the line on BFP status.  Specifically, the courts have largely protected the BFP’s exalted status in the law despite the best efforts of defaulting borrowers to dilute, and carve out exceptions to, BFP status.   

So, what is a BFP?  BFP is an acronym for bona fide purchaser.  A bona fide purchaser of real estate is one who buys property without knowledge of any adverse claims against it and gives value for the property.  In short, a BFP is an innocent, after-the-fact buyer who doesn’t know of any disputes relating to, or claims against, the property he’s buying.  The law protects a BFP by allowing him to acquire the property free and clear of all adverse claims that he didn’t know about when he bought.

In the foreclosure context, the third party buyer at foreclosure is almost always a BFP.  (If the foreclosing bank, by contrast, winds up taking the property back at foreclosure, BFP status is not as obvious).  Once a foreclosed piece of property is transferred by the trustee to a BFP, it is much harder for the foreclosed out prior owner to get a court to later set aside the foreclosure sale. 

Indeed, the only genuine claim by the defaulting borrower that he could raise against a BFP is that the foreclosure was “void”.  However, the courts have narrowly defined what constitutes a “void” foreclosure sale and “void” sales are not very common.  These days, by the time that the property is sold at foreclosure, there have probably been long running battles between the defaulting borrower and the bank.  One benefit of BFP status is that, in most circumstances, you can acquire the property free and clear of whatever disputes between the bank and borrower preceded the foreclosure. 

If you do get sued by a foreclosed homeowner, you should have a lawyer who specializes in this area look at your case right away.  If he determines that you qualify as a BFP, he’ll probably be able to get a good result for you and get the court to throw out prior to trial the defaulting borrower’s case against you.  But you’ll need the all-important determination of BFP status and then the attorney can guide your defense from there.      

    

The Implied Warranty Of Habitability Part 1: What Is It?

In simple terms, the implied warranty of habitability is like any other warranty, i.e., one person to a transaction is giving a warranty to the other that the product or service in question will meet or perform to certain standards. When a car dealer gives the buyer a warranty for example, the dealer is saying that the car will function at a certain standard and, if not, the dealer will repair at the dealer’s cost.

In landlord-tenant law, a landlord, whether he knows it or not, is extending a similar warranty to the tenant every time he enters into a residential lease. In California, for example, the landlord’s warranty of habitability exists in every residential lease whether it’s written in the lease or not. How can that be? Because the law implies the existence of the warranty regardless of whether the lease language contains it. In other words, the law engrafts the warranty-writes it in invisible ink-right into every residential lease. The courts will enforce that implied warranty even if the terms of the lease don’t actually include it.

So what is the implied warranty of habitability? It is a warranty, a promise if you will, by the landlord to the tenant given at the time of the lease that the rental property meets certain minimum standards of habitability, that the rental is fit for human living, and that the landlord will do repairs, at his cost, if the rental falls below those standards during the tenancy.

The statutes that define the implied warranty of habitability contain a laundry list of requirements with which a rental property must comply. In summary, the implied warranty requires that a residential rental property have:

1. Effective waterproofing and weather protection;

2. A water supply that produces hot and cold running water and is connected to a sewage disposal system;

3. Plumbing, gas or electrical facilities according to code and in good working condition;

4. Adequate electrical lighting, heating, natural light and ventilation;

5. Adequate sanitation, trash storage and removal, no infestation, and the common area and grounds maintained in a sanitary condition;

6. No general dilapidation. Floors, stairways, and railings must be maintained in good repair;

7. No structural hazards including deteriorated or inadequate foundations, floor supports, vertical supports, roof or horizontal supports;

8. Adequate and working toilet, bathtub or shower, and kitchen sink;

9. A deadbolt lock on all swinging entry doors that extends at least 13/16th of an inch beyond the strike plate and into the door jamb;

10. Adequate exit facilities, fire-resisting or fire extinguishing systems, and the building, equipment, grounds, and vegetation properly maintained so as to not cause a fire, health or safety hazard;

11. No nuisance as the term is defined by law; and

12. At least one usable telephone jack and inside telephone wiring kept in good working order.

The rental property must comply with the implied warranty of habitability at the time of the lease and the landlord must repair all subsequent dilapidations that render the property untenable, except for those conditions caused by the tenant. The tenant is also required to keep the condition of his portion of the premises clean and sanitary. The tenant must properly use all electrical, gas, and plumbing fixtures. The tenant must also use the living, sleeping, cooking, and dining areas as designed and intended. If the tenant fails to do so, the landlord is relieved of the obligation to repair.

If the tenant makes a legitimate complaint relating to one of the categories listed above, good rental property management requires that the landlord fix the problem. However, it is also good practice to keep all receipts evidencing the repair and have the tenant acknowledge, in writing, that the condition has been adequately repaired. I have seen tenants raise habitability claims at trial respecting conditions that the landlord previously repaired. If you’re a landlord, you’ll want to be able to prove that you completed the repair about which the tenant complains.

Often times, a tenant who foresees a problem with paying the rent will begin complaining to you about the condition of the premises. The tenant may also complain to the city’s housing authority. The tenant is doing this to discourage the landlord from filing an eviction case when the inevitable nonpayment of rent occurs or to set up a breach of the implied warranty of habitability defense to any later eviction action. A tenant may also complain to the city in order to set up a retaliatory eviction defense should the landlord later seek to evict. Lastly, a common tenant practice is to complain about the property’s condition to justify blowing out of a term lease.

I recommend to clients that they respond to the tenant’s complaint, make repairs as needed and document. But always insist upon the rent; don’t be reluctant to serve a 3-day notice, file an eviction case, or sue a tenant who has abandoned a term lease just because the tenant made complaints about the property. Experienced landlord attorneys see the habitability issue all the time. We know how to deal with it at trial. (I will not disclose how in this article because I don’t want tenants to read it and better prepare their cases). In my next article on the implied warranty of habitability, I will write about the consequences to the landlord of breaching the warranty.

Common Issues In Rental Property Management: Tenant Application And Screening

I recently walked out of court with a client after a trial. Although we had won, my client was shaking his head in self-blame, interrogating himself about why he had ever rented to this tenant. Although my client’s ordeal was largely over-we had obtained judgment against the tenant for possession and $8,000.00 in rent, costs, and attorney’s fees-the judgment was not so much a measure of victory as it was a measure of loss, a public reminder of how much my client had allowed a bad tenant to get into him, how much he was now out of pocket for subsidizing the living expense and broken promises of a liar.

Not a month goes by in my practice that I don’t hear clients utter the same phrase-sometimes in more colorful language-at least ten times: “I never should have rented to this guy. I never should have rented to this guy.” In the case mentioned above, after the tenant fell behind and my client started looking into his background, he learned from a previous landlord that the tenant had a prior eviction. At the time of our trial, the tenant was also under indictment for mortgage fraud and had a prior criminal conviction for possession of counterfeit government bonds.

My curiosity piqued, I did my own superficial background check on the tenant and found that, since 1995, this particular tenant had amassed six eviction judgments in his real name and two more under an assumed name, a total of eight evictions in just fifteen years. So how did this tenant-from-hell wind up in my client’s rental property? The need to ask the question is even more confounding when one considers that the rental was a new build, a four-bedroom house, rental price $3,200/ month, nice neighborhood, the kind of place that many qualified applicants would be happy to call home. My client didn’t need bodies. What was the reason, then, that my client’s rental property became home to The Convict and Serial Evictee?

Easy. My client didn’t screen. He didn’t verify the application nor did he run credit. Why? Because the tenant had made such a convincing appearance. He was mature, friendly, a good conversationalist, wore nice clothes, drove an expensive car, had a pretty girlfriend, and told a nice story about needing a house to start a family. The tenant also looked good on paper. He was, in short, an accomplished con man. Convinced that he had found the right man, my client skipped the verification process and signed a lease. And-when the rent started dribbling in, late, and the bad checks and broken promises outnumbered the timely payments-he soon came to regret it.

Every landlord-tenant relationship must begin with the same thing: a thorough application. Get a form application online, at Office Depot, or from your nearby landlord association. Just make sure that the application asks for the applicant’s full name, driver’s license number, social security number, and the last five years of home addresses. Most importantly, verify the information. Make the tenant show you his driver’s license and social security card. This information will also help out collection efforts later should you wind up getting a money judgment against the tenant.

The application should include current and past employment information for five years, banking information, and vehicle information. Make the tenant verify the information on the application by producing three recent pay stubs, three recent bank account statements, and a current title for any vehicles. Some landlords even require two or three years of tax returns. The application should also include references-the most recent landlords if possible-and emergency contacts. This information will provide essential information about the tenant and will also come in handy later should you ever have to collect a judgment against the tenant.

The next step is to run the applicant’s credit. The reports that you order up should include a combined credit report (i.e. a compilation report from all three major credit reporting agencies), an eviction and civil records search, a criminal database search, and employment and rental verification. You may charge the tenant the actual cost of the background check not to exceed $42.00. Sometimes the tenant, rather than pay the fee, will offer up his own credit report. Don’t accept it; get one of your own.

The report will provide the information that you’ll need to make an informed decision about the prospective tenant. You’ll also be able to compare the report with the application and draw a conclusion about the prospective tenant’s propensity for truth telling. The purpose of the report is not only to assess the prospective tenant’s financial capacity and creditworthiness. You also want to weed out the liars. Take a pass on any prospective tenant that supplies inaccurate information, refuses to provide information, or who has recent eviction judgments.

I’m writing this article at the end of October 2010. In just this month, I have worked on seven eviction cases where the tenant had an eviction judgment within the last two years. That’s just my practice, this month, and seven cases that I know about (i.e. where I learned about the prior evictions from my clients). There may have been others. The point is that bad tenants abound and you need to protect yourself from them.

Bear in mind some characteristics that I’ve discovered about tenants with recent evictions. First, they’ve learned a little something about the system. In other words, they know how to delay. Second, they don’t fear the system. They’re not afraid of court, judges, lawyers, the sheriff. They know the time periods and they know how to plan. Also, their credit is already wrecked so they don’t fear the hits to their credit that an eviction judgment and money judgment will bring. Trust me, you don’t want these people unloading a moving truck in front of your rental.

The deadbeat tenant usually has a string of financial victims. He’s just trying to make you the next one. Whether that happens is up to you. Remember, though, that a prior landlord paid an attorney to take an eviction case through to a reportable judgment so that he could warn the world about the tenant. If you fail to screen, you are effectively nullifying that suffering and cost borne by the prior landlord. Don’t make the past irrelevant, screen.

Just When You Thought It Was Safe To Go Back Into The Real Estate Market: Congress Amends Obama Tenant Protection Law To Hurt Real Estate Investment

Remember the trumpeted financial reform bill that Congress passed in late July? You know the one, the new round of regulations that would abolish greed, protect us from Wall Street, the slap-on-the-wrist political payback for the bailouts, the kind of major legislation that results in hours of cable news face time for politicians standing in front of too many flags.

Not noticed among all of the pomp surrounding the law’s passage was a small provision within it pertaining to, oddly enough, state landlord-tenant law. Congress must have calculated that, while it was burdening even the most honest financial institutions with new regulations, it would be “germane” to take a shot at the real estate investor as well.

Whether the “financial reform” law delivers on all the windy promises or, more likely, is just another set of expensive regulatory and compliance headaches for law abiding firms that didn’t get bailout money, will have to await a future article. Tucked away inside the bill, however, and germane to this article, was an amendment to President Obama’s Protecting Tenants At Foreclosure Act.

If you read my June 15, 2010 post, I wrote about the Act at length. One of my criticisms was that the Act failed to define “Notice of Foreclosure”, a critical term for deciding whether a real estate investor at foreclosure purchased a tenant-occupied property subject to the tenant’s existing term lease. Prior to the Obama law, the answer was nearly always “no”, the new investor bought the property free and clear of all junior encumbrances, including leases, which were extinguished by the foreclosure sale.

Thus, the new investor knew when bidding that he could buy a tenant-occupied property and “flip” it, i.e. fix it up and offer a renovated and vacant property to the market in short order. Because “flippers” sell their properties at fire sale prices, the new family coming in could often times obtain the property with equity already in it. It is from this process of fresh investment and profitable transactions that the real estate market digs itself out of a recessionary hole with the resulting appreciation in values being a tide that lifts everyone’s boat.

Under pre-Obama law, the new investor had no reason to be concerned about tenant occupancy because he knew that the foreclosure sale wiped out the lease. Obama’s blow-hard Protecting Tenants At Foreclosure Act changed that. Now, a real estate investor buys at foreclosure subject to any existing term lease. (All other leases require a needlessly long 90-day notice to terminate).

Thus, if a tenant has a term lease with ten months remaining on it at the time of foreclosure, the tenant gets to stay for that ten months even if the lease came after the deed of trust foreclosed upon. In other words, the real estate investor is stuck. He has no way of knowing prior to the foreclosure sale whether the tenant has a month-to-month lease requiring a 90-day notice to terminate or a term lease with God knows how much time left on it.

The result is that investors will pass on tenant-occupied properties leaving the bank to credit bid and add to its glut of inventory of foreclosed properties or investors will lower their bids to take into account the investment uncertainty. Either way, the law’s result is the same, it slows recovery by either keeping fresh money out of the foreclosure process or it contributes to downward pressure on the real estate market because foreclosed properties will not realize their full bid potential. The law was completely unnecessary-and nothing more than political window dressing and pandering to the more numerous tenant voter-because existing state law already adequately protected the rights of tenants. 

Back to the language of the Obama law. Whether a term lease survived foreclosure depended upon whether it was entered into before “Notice of the Foreclosure”. However, Congress failed to define “Notice of Foreclosure” in the original text of the law. Congress fixed-for lack of a better word-that problem in the financial reform bill on July 21, 2010.

The term “Notice of Foreclosure” was critical to the law’s reach. If Congress defined “Notice of Foreclosure” to mean earlier in the foreclosure process, i.e. closer to the underlying default by the prior property owner, such definition would better serve the real estate investor since it would mean that fewer term leases would qualify and, as to those that did, less time would remain on them after foreclosure.

If, however, Congress defined “Notice of Foreclosure” further out, say closer to the actual foreclosure sale, such definition would be better for tenants because it would bring more term leases within the ambit of the law and such leases would likely have more time left on them after the foreclosure.

Would anyone like to guess which option Congress and the President chose? You guessed it. Congress chose the latter, determining in the fictional world of politics that the tenant does not get “Notice of Foreclosure” until the moment of the actual foreclosure sale.

In reality, the tenant knows about the foreclosure months before the sale. Also, the tenant doesn’t get notice of the foreclosure at the time of the property’s auction since the tenant isn’t present for it. Thus, Congress chose to define “Notice of Foreclosure” at the very instant in time where the tenant doesn’t get notice of the foreclosure. Since the law was political from its inception, however, it shouldn’t be surprising that logic and fact as considerations finished dead last in its wording. The effect of the Notice of Foreclosure definition is that any term lease entered into before the moment that the trustee bangs his gavel is enforceable against the new investor and the property is burdened with it.

Congress didn’t bother to clarify the more looming ambiguity in the law, namely, whether the tenant with a month-to-month lease must pay rent during the 90-day notice period required to terminate his tenancy. Since the law is a political sop for the tenant voter base, it follows that the law won’t even pretend to be fair to real estate investors. After all, Congress and the President instructing tenants to pay rent would ruin the political ambitions of the Obama law.

 

 

Common Issues in California Rental Property Management: Disposition of Tenant Personal Property Left After Conclusion of Tenancy

Your tenant vacates. You start the process of turning the property around but are astounded to find that the tenant has left behind a couple of car loads of his personal property. What do you do? Short answer: Be careful. Be very, very careful. The problem of seemingly abandoned tenant personal property occurs most commonly when the tenancy has ended on less than favorable terms, usually eviction. In my experience, tenants that leave property behind are the most troublesome ones and the most likely to re-appear in your life.

I have seen landlords and their insurance companies have to pay out big bucks to undeserving tenants because the landlord failed to follow the correct procedure for disposing of the tenants’ personal property. The rickety end table and orphan left tennis shoe may look like junk. And the tenant obviously didn’t care much about them. But that won’t stop the tenant from later claiming in his lawsuit that the flea market possessions which he left strewn about your rental property were really worth a king’s ransom. Follow the correct procedure and protect yourself.

If the tenant’s property is truly junk, the law allows you to keep or throw out any property that the landlord “reasonably believes” is worth less than $300.00 resale. In such a case, the landlord must serve the tenant with a notice, personally or by first-class mail, stating the landlord’s intention to throw out the property if the tenant doesn’t claim it within 15 days (18 days if service of the notice is by mail). The notice must be served on the tenant at the tenant’s last known address. I recommend to clients that they serve the notice at all known addresses for the tenant, including work addresses and relatives’ addresses written on the rental application.

If you do elect to throw out tenant property, make sure that you inventory and photograph the property. You must have a persuasive record of what property you threw out should the tenant come back at you later and claim that you threw away his valuables.

If the tenant’s property remaining on the premises likely exceeds $300.00 in value, the law provides a procedure for getting rid of the property that you must follow strictly. First, you must serve the tenant with a Notice of Right To Reclaim Abandoned Property. (I provide a form notice as part of a packet of forms that I give to my to landlord clients free of charge).

You may serve this notice on the tenant either personally or by first-class mail to the tenant’s last known address. To be safe, I also advise my clients to serve the notice on all known addresses of the tenant’s, including relatives listed on the rental application. You must also serve this notice on any other person, besides the tenant, that you believe may be the owner of the property.

The notice has strict content requirements relating to the description of the property and the place where the tenant may claim it and informing the tenant that he must pay the reasonable cost of storing the property before he can get it back. The notice must also state the deadline for the tenant to claim the property, which must be at least 15 days after the tenant is served with the notice (18 days if the notice is served by mail). The notice must provide the name, address, and telephone number of the landlord or his representative and a warning to the tenant that his property will be sold at auction if not claimed.

While waiting for the 15-day period to expire, I advise landlords to store the property at the premises if possible. If the tenant contacts them, I tell the landlords to set up a time for the tenant to come and get the property. When the tenant’s property is still at the premises, I tell clients not to bother trying to charge the tenant for “storage”. The reason that I tell clients to just let the tenant have his property is because the ensuing dispute isn’t worth the storage reimbursement. If the tenant shows up to claim his property and leaves without it, I guarantee you that the first place that he’s going after arguing with you over storage charges is straight into the open arms of the tenant attorney.

If the tenant has left so much property behind that it can’t be stored at the premises, such as the case where the tenant was evicted and didn’t move anything out beforehand, then you may have to move the property into storage. In such a case, the landlord is entitled to his moving and storage costs before he has to release the property to the tenant. I’m more inclined in such an instance to advise my client to stand on his rights to reimbursement before releasing the property because of the amount of expense, time, and trouble that the tenant has caused my client.

However, if the tenant does re-appear to claim his property, I advise clients to give the tenant an itemized list of storage and moving costs and supporting documentation. In any case where my client does release property to the tenant, I recommend that the landlord have witnesses to the tenant taking back his property and, if possible, that the landlord document the event with a camcorder.

So, what happens if the tenant does not claim his property within the 15 days? The property must be sold at public auction. Call an auction company. They’ll come and pick-up the property. An important point: once the auction date is set, make sure that you publish notice of the auction. Notice of the auction must be published once per week for two weeks in a newspaper of general circulation. If you fail to publish the notice, you are opening yourself up for liability to the tenant.

After the property is sold, the auction company takes its share, the landlord may be reimbursed for all costs of storage, moving and publishing notice. Any balance must be paid over to the tenant or, if he can’t be found, to the county.

As you can see, California law is complicated on this point. The best advice would probably be to just contact a lawyer if your tenant leaves behind any substantial amount of property. If the landlord follows the procedure, he’s protected from liability. If not, the landlord may have to bear the cost of an uninsured liability straight out of his own pocket.

Common Issues in California Rental Property Management: Security Deposits

A landlord in California may obtain from the tenant, at the inception of the tenancy, a security deposit of up to two months’ rent for an unfurnished premises and up to three months’ rent for a furnished premises. The security deposit may be in addition to the first month’s rent charged in advance.

The landlord must hold the security deposit for the benefit of the tenant. The landlord may only deduct from the security deposit for unpaid rent, damage to the premises except for ordinary wear and tear, and cleaning the premises so as to return it to the same condition that it was in at the start of the tenancy.

Where one party terminates the tenancy (other than for breach of the lease or failure to pay rent), the landlord must give the tenant, within a reasonable time after notice of termination, written notice of the tenant’s right to an inspection and advance notice of deficiencies that could result in deductions from the deposit. The tenant must then request the inspection. If the tenant does so, the landlord must inspect and give the tenant an itemized statement of problems with the property’s condition so that the tenant has the opportunity to correct them prior to move-out. The parties then typically schedule a final walk-through where the landlord can check to see if the tenant has corrected the problems.

The landlord has 21 calendar days after the tenant vacates to give the tenant, by personal delivery or by first-class mail, an itemized statement showing all deductions from the security deposit and return to the tenant any unused portion of the deposit. For all deductions, the landlord must also provide supporting documentation such as invoices, bills, receipts, etc. If the landlord fails to account for the security deposit to the tenant, the tenant may sue for return of the deposit. If the tenant can show that the landlord’s retention of the deposit was in bad faith, the court may award the tenant a statutory penalty of up to two times the amount of the deposit.

Common Issues in California Rental Property Management: Tenant Abandonment

Tenants who are behind in the rent commonly just pack up and go without saying a word to the landlord and with time left on their lease. When you believe that your tenant has fled under cover of darkness and that your rental property is now uninhabited, what should you do?

The answer has two parts. First, you need to terminate the tenancy and prevent the tenant from returning. California law provides a simple method to achieve that goal. The landlord in such a circumstance need only serve a Notice of Belief of Abandonment on the tenant. (I provide a form notice as part of a packet of forms that I give to my to landlord clients free of charge). When can the landlord serve such a notice? The tenant must be fourteen days behind in the rent. The landlord must also “reasonably believe” that the tenant has abandoned the premises.

By “reasonable belief” the law means that the landlord must have facts that reasonably lead him to the conclusion that the tenant has left, facts such as accumulating mail or newspapers, disconnected phone or utilities, lack of vehicles, failure of the tenant to answer the door, and, if it’s possible to see in from the outside, the appearance that the premises are empty. Just to be sure, I advise clients to post a 24-hour notice of entry on the door and then return the next day and enter the premises to check if the tenant has moved out.

The next step is to serve the notice. The notice must be in writing and served at the tenant’s last known address, which is usually your rental property. I also advise clients to serve the notice to all addresses where the tenant is likely to receive it such as work addresses or the addresses of relatives stated on the rental application. The notice can be served either personally or by first-class mail.

Once the landlord serves the notice, the tenant has 15 days (18 days if the notice was served by mail) to respond in writing. In the response, the tenant must state that he has not abandoned the premises and must provide the landlord with an address where the tenant may be served by certified mail with any eviction case. If the tenant does not provide such a writing within the 15 or 18 day time period, then his tenancy is deemed terminated and the landlord may re-let the premises. The landlord is also free to serve a 3-day notice to pay rent or quit at any time permitted by the lease.

Second, the tenant’s abandonment does not cut-off his obligation to pay rent. The landlord must use reasonable efforts to find a new tenant. If the landlord does so, the abandoning tenant is still obligated for the rent through the end of the term. The tenant’s obligation ends when the landlord finds a new tenant, assuming that the new tenant is paying the same or higher rental rate. Once a new tenant is found, the landlord will be able to calculate the lost rent due to the tenant breaking the lease and may sue the former tenant.