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    Default Effect of a Foreclosure on a Lease With an Option to Buy

    My first post, so let me say TIA for any and all assistance. And for what it's worth, I'm a Moderator on a custom knife forum, so I'm familiar with a forum's operation and social nuances. That being said, we're most appreciative for your input. Here's the deal............

    We are renting a lovely home in northern Michigan. I am a Realtor (new to the profession). I wrote the lease, as well as the subsequent lease with option to buy. All are contracts pulled from legal websites, and conform to MI Landlord/Tenant Law. There are no additional peculiarities or inclusions in the leases.

    We have a 2 year lease (ends January, 2008) with option to purchase. Rent is $1,500/month. We've put down $5,000 towards the option. Security Deposit of $1,800, Pet Security Deposit of $1,000. Offer to purchase on option is $345,000.

    Owner is a builder. He built two homes, and got squeezed HARD between mortgages, so he rented us the house we live in. It's less than 2 years old. He sold the house he lived in and moved his family to Florida for work.

    He calls tonight to tell me they are declaring bankruptcy. Sounds like the house has a 1st and 2nd mortgage. They owe $335,000. I believe that to be the total they owe (1st + 2nd), thus the "mortgage" is probably less.

    Here's my questions...........

    1. Leases run with the land, but what about with foreclosures? Can we be evicted?
    2. How can we find out (short of asking the landlord) what the 1st mortgage is? We may be interested in purchasing the home. BTW, we get along well with the landlord, he even offered to waive rent based on the value of the downstroke we put down towards the option.
    3. Is this an opportunity if handled correctly (i.e. - Are we sitting pretty with a chance to get a good deal on the home)?
    4. I own a lot with an appraised value of $150,000 that is presently for sale. How can I use the equity in this lot to get into the house, if I can get the house for a good price?
    5. Your opinion of the situation?

  2. #2
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    Default Re: Effect of a Foreclosure on a Lease With an Option to Buy

    Your lease should run with the land, such that any purchaser would take the land subject to your lease. You can check with the register of deeds to see if a note was recorded reflecting the amount of the mortgage(s) on the property. It's also possible that any publication or posting relating to the foreclosure would reflect the amount.

    It's my understanding that Michigan permits a property owner to redeem a property for a period of between six months and one year following foreclosure, depending upon the size of the mortgage. (The period can be shorter if the property is abandoned; but obviously it is not.) The deed you get after a Sheriff's Sale should indicate the redemption period. You have to be careful about investing in a property during the redemption period, just in case the former owner redeems it.

    In many cases, the only bidder at a foreclosure sale will be the lender. Sometimes, if the difference between the total debt and equity is significant, others will bid as well. It's hard to know if you can get a good deal without knowing how much is owed.

    You can use your lot to try to get a line of credit which would enable you to pay for the foreclosed property, in the event that you obtain it through the foreclosure sale. Obviously if they owe $335,000.00, you would need more than $150,000.00 to cover that figure.

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