'Right to Rent' Presents Another Opportunity to Buyers

Investors are seeing REO rentals as a good opportunity to come in, fix up the properties, get them in habitable condition and rent them out for the short term with a long-term investment, according to industry insiders.

The Right to Rent Act of 2010 was recently introduced by Rep. Raul Grijalva, D-Ariz., and co-sponsored by Rep. Marcy Kaptur, D-Ohio. If enacted, the bill would allow homeowners in foreclosure to remain in their homes as renters for up to five years after receiving a foreclosure notice.

According to the National Low Income Housing Coalition, the legislation would provide mortgagors of one-to-four unit buildings and condominium and cooperative units that are in foreclosure the option of remaining in their homes for five years as tenants.

The former owner would be charged a fair market rent as determined by an independent appraiser who is licensed or certified to conduct appraisals in the property's jurisdiction. Once the rent is set, it would be adjusted each year by the "owners' equivalent rent of primary residence" component from the consumer price index.

Nationally, this index has remained largely unchanged in the past year. While it can be expected to increase as housing markets improve, the index could also decrease if home prices continue to fall. The owner could also use an independent appraiser no more than once a year to redetermine the fair market rent. The act explicitly states that the transition to a lease under the program does not hinder a foreclosure or the right of the tenant to pursue a reinstatement of the mortgage.

To be eligible, a property would have a purchase price that is less than the current median purchase price for residences that are located in the same metropolitan statistical area and the loan would have been originated before July 1, 2007.

The new owner of the property, which will initially be the bank, would be able to terminate the tenancy for material breach, and the former owner must use the property as a principal residence during the period of the lease. The landlord-tenant relationship would be governed by local landlord-tenant laws.

While "a five-year lease is unheard of," in the industry, the premise of the legislation is all about stabilizing neighborhoods. "There is a market for the rental properties. After you rent doesn't mean you can't sell the property to someone else," said Alan Paylor, president of REO Leasing Solutions. "I think you are going to find the technology being built out as well to trade lease properties."

Sub-brokers and brokers are selling properties from hotels to casinos to REO single-family, and land-only deals.

"That same market is going to fall into the leasing world. We have one investor that sells his properties often to offshore investors. There is a good yield to be had. People are focused on that as an investment. The tenants are happy and interested in maintaining that lease."

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