The PTFA: What Real Estate Investors Need to Know
I’m sure many of you can remember, or are at least aware of what the housing market was like around 2008.
Dismal to say the least.
The Case-Schiller home price index reported its largest price drop in history, foreclosures increased seven-fold, and there was a credit crisis that resulted from the bursting of the “housing bubble.”
The 2007-2009 recession was brutal, and it affected a lot of people.
If you were an investor or real estate professional during this time, you’re probably having some PTSD flashbacks.
Luckily, the housing market began to bounce back around 2012, and Warren Buffet was a major reason for that.
He was the spark that lit the fire for what is now single family home investing. He suggested investors should buy up homes while prices were low, and then reap the benefits when the market leveled out.
And that’s just what began to happen.
We can now see the results of that idea. It’s a MUCH different climate today.
In Indianapolis, there’s not even enough inventory to go around because so many people are investing here, and seeing major success.
Let’s go back to 2009 for a second, though.
During this crisis, thousands of people were being displaced from their residences due to foreclosures. Both homeowners and renters.
For renters, however, it was a little more unfair as they weren’t necessarily the ones falling behind on payments. Typically, homeowners would receive notices and warnings about impending foreclosures and could plan accordingly, renters were often blindsided with the news and left with little time to make arrangements.
So, there was an obvious need for some sort of protection for these individuals.
THE PROTECTING TENANTS AT FORECLOSURE ACT OF 2009 (PTFA)
In order to ensure renters had a fair chance to find alternative housing if their rental home was foreclosed on, President Obama passed the PTFA on May 20, 2009.
The tenant protection provisions apply in the case of any foreclosure on a federally related mortgage loan or on any dwelling or residential real property. They provide that any immediate successor in interest in such a foreclosed property, including a bank that takes title to a house upon foreclosure, will assume the interest subject to the rights of any bona fide tenant and will need to comply with certain notice requirements.
Interestingly enough, this law expired in 2014, and was permanently reinstated by President Trump in May of 2018.
WHO’S A BONA FIDE TENANT UNDER THE PTFA?
The PTFA defines a bona fide Tenant as a person in possession of the property, with or without a lease, if:
- The Tenant isn’t the mortgagor or the child, spouse or parent of the mortgagor
- The lease or tenancy was an arm’s length transaction
- The rent isn’t substantially less than fair market rent for the property (or the unit’s rent is reduced or subsidized due to a federal, state, or local subsidy)
Note: An arm’s length transaction is one in which the buyers and sellers of a product act independently and do not have any relationship to each other.
The concept of an arm’s length transaction assures that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party. It also assures third parties that there is no collusion between the buyer and seller.
HOW DOES THE PTFA AFFECT INVESTORS?
Purchasing foreclosed properties can be a great opportunity for investors looking to get a good deal.
However, you need to understand the PTFA and how it will affect your investment if you purchase an occupied property.
The PTFA applies to all foreclosures on all residential properties; traditional one-unit single family homes are covered, as are multi-unit properties. The law applies in cases of both judicial (Indiana) and nonjudicial foreclosures.
Tenants with lease rights of any kind are protected as long as the tenancy is in effect as of the date of transfer of title at foreclosure.
So, what does all of this mean for you as an Investor?
Know what you’re getting yourself into when you purchase a Tenant-Occupied, foreclosed on property.
Bona Fide Lease – If the Tenants occupying the dwelling can produce a legitimate lease, then you are required under this law, to allow them to carry out the remainder of that lease term.
You, as the new Landlord, are required to abide by all of the terms in the lease as well.
Furthermore, if the Tenants have Section 8 assistance, you must allow them to retain their current payments and you must assume the housing assistance payment contract associated with the lease.
Buying a Tenant occupied rental has a lot of pros, namely, instant cashflow. However, you simply have no idea who is living in your property.
It could end up being a huge success, or a huge headache.
No Lease or Month-to-Month Lease – If the Tenant cannot produce a bona fide lease, or is on month-to-month, then by law you are required to give them at least 90 days’ notice from the time of title transfer.
Once the 90 days are up, if they have failed to vacate, then you have to file an eviction and go through the court process to legally get them out of the property.
Personal Residence – If you plan to personally live in the purchased property as your primary residence, then again, you must give the Tenants 90 days’ notice before filing for eviction.
I DON’T WANT TO BE A LANDLORD. WHAT ARE MY OPTIONS?
So, let’s assume that you acquire a property via foreclosure and the occupant does produce a bona fide lease.
Let’s also assume that you don’t want to be a Landlord. Your goal is to flip the home for a profit and having a Tenant in there is not only slowing you down, but also tying up your capital.
You ask the Tenant to leave, but they refuse. They don’t want to move and, furthermore, they have no legal obligation to move.
A popular tactic that investors and banks use is a cash for keys scenario, where you pay the Tenant to vacate the home.
Some Tenants will agree to it.
If you really need to get the Tenants out the home, this is a tactic that oftentimes works.
For example, let’s say that the Tenant is paying $1,000 per month to live in the home. You may offer $2,500 for the Tenant to leave. This amount of money would help pay the security deposit that the Tenant will need and also moving expenses.
In your case, you get possession of the home much sooner than expected, which could save you thousands of dollars in both holding and opportunity costs.
It’s a win-win situation for everyone.
Be careful in how you approach a cash for keys offering. Use an attorney to draft the contract and ensure that no money changes hands until have you the keys and the property is vacated.
HAVE A LITTLE SYMPATHY
At the end of the day, purchasing a foreclosed on property is a big win for you as an investor, however, it’s a big loss for whoever is living in the home.
These situations can cause a lot of tension because, let’s face it, the feeling of losing your home is a high stress event. With emotions running high, it can make people do and say irrational things.
Tread carefully, act according to the confines of the PTFA, and try to have a little sympathy for the people who had no choice in the matter.