Foreclosure Crisis & Rental Advice

Excellent article over at WaPo about the foreclosure crisis catching renters off guard. A lot of good information in the article such as 1 in 5 foreclosed on homes is not owner occupied. One specific piece of relevant information to Baltimore is,

Starting Monday[8/11/08], tenants in [Baltimore] foreclosed-on homes must get at least 14 days notice -- by certified mail and first-class mail -- before eviction.

A week before the eviction, the sheriff's office must post a written notice on the door. "It's a good first step, but two weeks is not enough time to find a new place to live when the affordable rental market is tight," said Sally Scott, co-chairman of the Baltimore Homeownership Preservation Coalition.

That's as good as it gets for tenants in Maryland, said Kathleen S. Skullney, a foreclosure lawyer at the Legal Aid Bureau in Baltimore. In limited circumstances, a lease may survive a foreclosure, but otherwise, the new owners are not obligated to contact renters in advance. Many limit their efforts to dealing with borrowers and courts.

Once the foreclosure is approved and eviction is legally allowed, the renter may have to leave on the spot.

"The renter has no defense at that point," Skullney said. "If there ever was an overlooked and uncontemplated consequence of the foreclosure crisis, this is it."

In other words Renters beware! Being a renter myself and on the market for a new rental (until last week) I am very cautious about the financial situation of any potential landlord. Renters I would recommend doing your due diligence and pulling all the mortgage information you can gather.

First start with finding out who is the owner of the place which you may not know if the rental is represented by a Realtor. I start with the Maryland Real Property Search. After I have found the owners name I head over to Maryland Land Record (requires a free registration) and pull all the mortgage history on the owner. A few key things I look for are equity withdraws, purchase money, how much equity is in the Rental (difference between purchase prices and "any new mortgage" in the Deed), Adjustable Rate riders, etc... If the Landlord has little or no equity in the project then you may need to be wary. I personally use all available information and try to compute the landlords monthly carrying cost and compare it to their potential rental income.

As an example, I just signed a new rental for $1400 in a prestigious neighborhood in Northern Baltimore County. The home was built in 2006, has about 1700 sq.ft., granite counter tops, recessed lighting, hardwood floors, and the neighborhood is being marketed as "luxury living". These homes are for sale at $350,000 which equals a payment of $2,155 with no down-payment at 6.25%. The annual tax is a little over $3000 or about $250 per month (found this from the Maryland Real Property search previously mentioned). The HOA is $250 per month. To own this home would cost $2,655 per month (2,155+250+250) excluding maintenance, but I'm renting it for only $1400 or a 47% discount renting vs owning. By renting I don't have exposure to price declines plus I don't have to worry about paying for an exterminator, maintenance, mowing the lawn, buying a new water heater when it breaks, etc. But I didn't just want a good deal (read 47% discount), I wanted a "stable" landlord who wasn't going to fold overnight. So you may ask how can the landlord afford a $1,255 per month loss (2655-1400), well they can because it is in the equity and not the cashflow. In other words, the landlord had a huge downpayment on the rental and their monthly carrying cost is literally equal to the rent price excluding vacancies, maintenance, moving the lawn, management, advertising, etc. So I get to live off somebody else's eroding equity while I can continue to save. Knowing these bits of information saved me from renting one of the other 15 rentals I've look at over the past two months. By looking at the financial information, I could see that at least 10 of these homes will be in foreclosure in the next year or so. I even saw a rental from Katherine Connelly, the executive director of the Maryland Real Estate Commission (the group which issues Realtors licenses). She must have been drinking the kool aid for unstated reasons; you can figure out if you search the records. The rental market is flush with good deals and remember, you can always negotiate the rental price lower (I did). Part of the reason I created this blog was to help prudent people protect themselves from current crisis and even bigger crisis coming soon. Helping renter avoid desperate landlords would fit this mission as would helping first time buyers avoid buying at inflated prices.

Going back to the WaPo article, Tanta co-author at Calculated Risk has a good commentary on the article called, "Why We Have a Foreclosure Crisis in the First Place". I would recommend going over there to read the post.