With the foreclosure settlement out of the way and the pace of foreclosure proceedings picking up, there is a lingering question about the fate of renters currently living in homes going through foreclosure. The question is getting even more scrutiny now that private investors are beginning to view foreclosed properties as an opportunity to make good money in the real estate market. Fortunately, there are protections in place that prevent renters from being thrown out in the street when a property is seized by a bank.

This subject was highlighted in a recent report by San Antonio’s KSAT regarding a local woman who learned the rental house she was living in was foreclosed upon when a potential buyer stopped by to take a look at the property. She was obviously shaken by the news, especially given the fact that she and her family had just moved into the home a few months prior in order to allow her widower father to live with them.

“I was supposed to be starting our life over after losing my mom and my dad and us living together, not just more changes,” Liz Johnson told KSAT.

According to the report renter’s had few, if any, rights during the foreclosure process prior to 2009. But an attorney by the name of Robert Ray told KSAT News that changes in federal regulations now protect renters who have a valid lease and are current with their rental payments.

“The bank cannot evict a bona fide tenant unless they give them at least 90 days written notice,” Ray said.

The right thing to do

Protecting renters against property foreclosure is the right thing to do. Quite frankly, it’s surprising to learn that renters lacked protection for as long as they did, given the fact that leases are legal contracts between homeowner and renter. Nonetheless, the past is the past. Today’s renters have enough time to relocate if it turns out their homes are the subject of bank action. Certainly it’s not an ideal situation, but it least it is a workable one.

That said, is it time to consider requiring purchasers of foreclosed homes to honor leases until their original expiration date? After all, most standard leases make that provision if a property is sold voluntarily, outside of the realm of foreclosure. It would seem as though a foreclosed home being used as rental property should be sold as such with the stipulation that the arrangement must continue until the current lease expires. That only makes sense.

Real Estate Investors Beware

It appears as though the issue of renters in foreclosed properties as likely to get more traction as home sales pick up in the coming months. Real estate investors would do well to pay attention if they want to avoid public perception turning further against them. It can’t be denied they are already looked upon with the same contempt reserved for used car salesmen and lawyers. They could do themselves a huge favor by honoring leases on the properties they buy.

If it turns out that investors do honor leases voluntarily the issue may simply go away without the need for any further federal regulation. In a perfect world that would be the ideal situation. The less the federal government has to get involved in the housing market the better off everyone is. Unfortunately, there may be some investors who are simply not willing to do the right thing. Because of a small minority, renters may be well on the way to seeing further relief via regulatory changes. We’ll have to wait and see.