California's Eviction Moratorium
San Bernardino County has extended the state's eviction moratorium until the end of July. The eviction moratorium was put in place to help tenants who may have lost their jobs, or income, because of the state's stay-at-home order. Laws that seem to help, on the one hand, can have unintended consequences on the other. Take, for example (as reported by CBSLA), a couple in Apple Valley, who bought their dream home as their primary residence in mid-March, pre-COVID, and today, at the end of June, they can't move in. They've tried everything to get the seller to move out: offering $5,000 cash, and still, the sellers do not respond. The other option the new home owners have is to evict the former sellers, now tenants. However, eviction attorney, Melissa March, says even after the end of the eviction moratorium, it will be a long time before the couple can get a court date.
“Right now the courts have said there will be no eviction summons, which is what starts the eviction process in court, until 90 days after the emergency is lifted and there is no end in sight for this emergency,” Marsh said.
What went wrong with this picture?
The problem as I see it is in the news report where it says,
The couple also agreed to a 30-day leaseback so the previous owners would have more time to move out.
The couple did receive one month's rent as agreed to in the leaseback, but it appears not one dime more. Moreover, the sellers did not turn over possession of the property to the buyers, the new owner of record. In my opinion, the leaseback was the mistake that led to an awkward result. An experienced professional does everything he or she can to mitigate outcomes that result in damages to clients, and what we call risk management. Clearly, the buyers in this situation have been damaged. They are paying on a mortgage for a home they can't live in. Most likely, if the sellers do not cooperate and move out, the couple will lose their dream home to foreclosure. This will result in further damages because they won't be able to purchase another home until at least 4 years later, or maybe even up to 7 years later. I wouldn't want to be either of those real estate agents right now.
Once upon a time, I was a newbie in real estate
When I started selling residential real estate in 2007, the practice of allowing a seller to remain in possession after close of escrow just wasn't in our consciousness. Did buyers rent back to sellers in those days and before? I'm sure they did but with a real estate broker's oversight, or a real estate attorney writing a rent back agreement for buyer and seller. A real estate agent is not qualified to write up an addendum on their own, and certainly not something as legally binding as a leaseback agreement.
In 2012, California Association of Realtors® created a new form (along with many others) called the "Seller in Possession Addendum." It was in response to a growing need that sellers needed more time to stay in the property after closing to arrange for moving, and other details, that often did not coincide with the close of escrow date.
In 2016, the form was revised and called, "Seller License to Remain in Possession Addendum."
A new fad is born
Suddenly in 2016 I noticed a plethora of listing agents noting in the MLS, "seller will need a leaseback of 14 days after close of escrow," or however many number of days. The Seller License to Remain in Possession Addendum is to be used for a leaseback of up to and less than 30 days. To date, I have never used this form, and not going to say I will never use it, but I can see it could end up being a real can of worms if the seller decided not to follow through, for whatever reason. Remember what I said about risk management? A professional is looking out for risks to avoid for their clients that involve damages. That's what we agents mean when we say "we look out for your best interests." We don't want you, as our clients, stuck in a legal can of worms because it can be very costly to get out of said can. At least that is what I mean when I say I am looking out for your best interests. One of my goals is to save my clients' money, not cost them money.
Ring, ring, can you help me short sale?
I got in to listing short sales because it seemed my phone was ringing off the hook from people needing to do something with their homes and underwater mortgages they could not pay. One such call was from a homeowner who bought a property as a rental and had tenants living in it. The homeowners had a loss of income from their businesses, and wanted to short sale their rental property. I voiced my concern trying to short sell with the tenants still living there, but the homeowners assured me they were nice people (I later suspected they were family members which I'll get to) and would cooperate with showings.
Mr. Tenant was cordial, at first. We agreed which days of the week would be best for showings, and I promised I would give him more than 24 hours notice (the minimum in California). To make a long story short, Mr. Tenant decided not to cooperate. Then he became hostile towards me when I called, and then finally unresponsive. I reported Mr. Tenant's lack of cooperation to the seller, and suggested if there was some way they could get (1) the tenants to cooperate, or (2) the tenants to move out. The homeowners then told me the tenant had stopped paying rent. Last option I suggested was to evict their tenants. The homeowners absolutely refused to evict, and why I'm guessing Mr. Tenant was a relative. At which point I told my clients without showing the property it is going to be difficult to get a buyer, and time was running out since they had stopped paying their mortgage long before they contacted me.
Eviction would have taken too long any way. Not sure exactly when Mr. Tenant and family left, but I was contacted by the seller a "Notice of Sale" had been posted on the front door, and the front door key was under the mat. I went to the property and could not believe my eyes. What was once a modest, clean and neat, 5-year old home when I first saw it, turned in to a filthy trash heap. All the windows missing screens were left open, there was stinking garbage everywhere, carpeting trashed, kitchen trashed, broken cabinet doors and drawers, kitchen stove covered in grease as if it had been poured on purpose. The smell was nauseating. Dutifully, I went back to work. Ramped up my MLS marketing efforts, called every agent I could think of who I thought might have a buyer who would be interested in a fixer. I got one call from an investor. We met at the property. He saw it. He said, no. I knew this was my last chance to get a buyer for the property, so I tried to persuade him the value of buying this property. He concluded by the looks of the condition, it was going to cost too much money for his budget to fix up. I was crestfallen, as this was literally the 11th hour before notice of sale date. The home went to foreclosure.
What I learned and did differently after
It has been said we learn more from our failures than our successes. I believe that is true. The take away is had I known what the end result was, I wouldn't have taken the short sale listing in the first place. But I didn't know. What I do know is tenants in a property can be precarious to a home sale. Too many things can go wrong. People can be fickle, change their minds, or life events beyond anyone's control take over. I recall one time a buyer was giving my seller 3 days after close of escrow to turn over possession. It seemed generous, but dangerous. However, I knew my sellers had other plans and were anxious to move out to their new home. The danger comes in when the buyer is intending the home for their primary residence. If the seller decides not honor the contract and leave when supposed to, they become tenants. Then the new owner is responsible, and has to take the time and expense for eviction. Investor buyers generally don't care if there are existing tenants and are glad to have built-in tenants if they want to stay. From my experience, I would not recommend a client buyer of mine to agree to a seller leaseback on a home they intend to use for a primary residence, or that has existing tenants. Only unless they are willing to understand the risks and pay the price if it doesn't turn out as planned. Most sellers and buyers honor their contracts, but it is always that rare one that sticks out as a reminder that you just never know.
Dear Agents, keep your crystal ball polished and ready for action. If you get the slightest hint something is not right, follow your gut instinct. Looking back, I had a hunch something wasn't going to end right with that one, so in that sense I was right, but in another, was so wrong not to have acted on my intuition.
End on a happy note?
The home sold as real-estate owned (foreclosure) for $3,100 more than the price I had as list price. I didn't get anywhere with the lender because I never had an offer to give them, so I don't know what price they would have approved, or if they would have approved short payoff for the borrowers. It had been on the market for 225 days before expiring. That home was in such terrible condition. All the bank did was take out the trash, and someone actually bought it. 6 years later, new flooring, new kitchen cabinets and appliances, same dirt backyard, and same broken hinge on bathroom cabinet door, home sold for 233% more. Does this even make sense? I would say, the buyer made a good return on their investment at 133%. For that size home, renovations were a drop in the bucket, and did not cost close to ROI. So not everyone loses in a down market. There's always a winner somewhere.
Ask me how you can be a real estate winner. Tel 951.491.4063, firstname.lastname@example.org, Pamela Seley, CalBRE Lic #01824145, serving the Inland Empire in southern California since 2007.
*Title was inspired by Stanley Kubrick's 1964, satirical film, "Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb."
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