The short answer is “no,” you cannot rent a bank-owned home that is in foreclosure. This is not an option because upon foreclosing, the bank is looking to sell the house as quickly as possible to recover the loss.
However, you can buy a foreclosed home, which might negate renting at all, but some risks come with this. You could also rent a house that is not bank-owned at a more reasonable price and with less risk.
How to Buy a Foreclosed Property
Foreclosure homes vary; they’re not only in low-income neighborhoods but in any neighborhood, so you could find a lovely house in foreclosure and nab it at a wholesale price. But how do you find one, and how is the buying process?
Buying from the homeowner. Before it officially goes into foreclosure, purchasing a home is called a short sale. In this case, the owner must ask permission from the bank or lender to sell for less than what they owe.
While buying a home in foreclosure is cheaper, if your bid is too low, the bank can reject your offer.
Other risk factors:
- The contract can be cut for any reason up to closing, or the seller could get a better deal. Therefore, you lose money on the appraisal and inspection cost.
- The process could take up to a year and affect loan approval and interest rates.
Buying at an auction. 3rd party trustees will likely run the auction on behalf of the bank. The sale is quick and often very cheap. But the risk here is that you probably will not get the chance to get an appraisal of the property.
This means you could be buying a home that has more costly repairs than it is worth. Additionally, these likely have a lien on them, and your lender might not approve a mortgage for the house.
Other risk factors:
- Not a good option for first-time buyers due to the requirement of having cash at hand.
- Sold “as-is,” any repairs are now your responsibility
- No seller disclosure
Buying from the Bank (REO – real estate owned). Of all the options, this is the most reasonable. Unlike buying at an auction, this option allows you to get an inspection and appraisal before purchasing the home.
However, the downside is that the contract can fall through at any point, mainly because the lender got a better deal.
Other risk factors:
- In the worst condition because they are in the last stage of the foreclosure selling process.
- No seller disclosure requirement
- The contract can be cut for any reason up to closing, or the seller could get a better deal. Therefore, you lose money on the appraisal and inspection cost.
If you still decide to buy a house under foreclosure after understanding the risk, here are some tips to ensure that you get the best deal with maximum protection, especially for first-time buyers.
Decide on the path you’re going to take towards buying a foreclosure home. The further into foreclosure the home is, the worse the house’s condition because of the vacancy. Purchasing the home before it goes into foreclosure holds the least risk of costly repairs.
Get a Real Estate Agent AND a Real Estate Lawyer. The agent should be experienced in foreclosure sales and a lawyer for your protection.
Be ready financially. As mentioned above, the auction requires cash at hand, and then you later run the risk of your bank not approving the mortgage due to the condition of the house.
The time it takes to buy potentially increases the interest rate. And if your contract falls through, you could have potentially wasted money on an inspection or appraisal. Finally, the biggest reason is that the repairs could be worth more than the house.
While the risks are significant, this could be a one-in-a-million situation where the buying process runs smoothly, and you save money in the long run. Be aware of the risk and tread lightly.
Is renting the better option?
Can You Rent a Home in Foreclosure?
While renting a home in foreclosure is possible, it is not out of choice but because of a foreclosure.
If you decide to rent, I highly recommend not signing a lease through a bank on purpose.
After a foreclosure, banks will put the house back into the market for rent while trying to sell because selling a foreclosure home can take a while.
But because banks want to sell the house quickly, there could be clauses in the contract that could trump your tenant’s rights. Additionally, the maintenance and repairs of the rental are less than subpar because the bank’s primary goal is to collect rent.
However, there are exceptions if you were renting the home through the previous owner – your landlord – but the bank now owns it.
What Are Your Rights as a Renter in Foreclosure?
Until the Protecting Tenants at Foreclosure Act of 2009, the tenants had no protection.
Prior, the tenant had no idea that their rental had been foreclosed and continued to pay their rent to the landlord, who was pocketing the money and not doing their landlord duties. Additionally, the tenants were evicted with little or no warning.
The Act in 2009 ended in 2014 but thankfully was reinstated in 2018 with the Economic Growth Regulatory Relief and Consumer Protection Act. Also, many states followed suit and added protection for their tenants to their laws.
In some places where the States Law protects the tenant more than the Federal law, the State is secured and applied to the lease protection.
Here is how you’re secured if the house you are renting goes into foreclosure:
- If you’re on a lease, you are allowed to stay until your lease is completed.
- If you’re on a month-to-month lease, you are given a 90-day notice.
- In some cases, the landlord must honor the lease, meaning they must continue with maintenance and repairs of the property.
- Change of ownership does not justify eviction or termination. Including those using a section-8 voucher.
There is one exception to your protection. If the bank manages to sell the foreclosed home and the new owner wants to live in the house, your lease will be terminated.
However, you get an eviction notifying you of the time you must leave the property – around 90 days.
Because a lease is a contract, and if the foreclosure causes you to lose your lease, you can sue your previous landlord in a small claims court.
You can sue for costs and damages such as moving expenses, application fees, and the difference in your rent if you are now paying a higher rate at a different location.
If you want to learn more about your rights as a renter, you can search for your state’s tenant’s rights at Law Help.
FAQs
Is Renting to Own Better Than Buying?
Renting to own is an excellent option to test out the house and the neighborhood before committing to a 30-year loan. It also gives you time to build your credit and, in some programs, sets money aside for you to later use as a down payment.
However, there isn’t much room for mistakes. If you miss a rent payment, you lose the contract and your money. Plus, you go through the same process of inspection and preapproval that you do with a traditional mortgage.
I believe it is better to rent on your own until you can get approved for a mortgage, instead of paying above the market price for rent and the possibility of losing it all with one mistake.
How Do I Find Rent-to-Own Homes Near Me?
Contact a Seller. If a home has been on the market but hasn’t been sold, they may be open to the possibility of getting extra cash each month and potentially selling the house at the end of the agreement.
Look through a Foreclosure Market. Find a home that has a risk of foreclosure. This offers the seller security of collecting rent each month and a promise of a potential sale.
Family and Friends. Ask your neighbors or Facebook groups if anyone is interested in the opportunity. Plus, you get to stay relatively close to a neighborhood you already know.
Check out programs such as Dream America, Divvy, or Home Partners. These programs offer a safety net and allow you to walk away from the house if you need to instead of dealing with individual sellers that may not have your best interest.