I own several rental properties in Washington State that are currently being foreclosed on.

Although these properties are partially empty, they do have some renters generating income.

However, since I am so far into the foreclosure process, the banks won't accept a partial payment, and I don't have enough funds to bring the property current, so the foreclosure continues.

Here's my question... do I have further liability (beyond the standard deficiency judgement if any auction doesn't cover what's owed) to the bank for those funds that I do collect from renters during this period?

Someone told me that it might be fraud and a crime to keep that money under those circumstances.

Is that true? If so, how would I best proceed?

Thanks!

As far as I know, only California has a law that requires landlords to apply rental payments towards the mortgage. However, the CA law is fairly recent and was passed in response to an increase in foreclosures. So its possible that other states may be passing similar laws.

My suggestion to you is to place the rent received into an escrow account. Once the foreclosure is finalized, you can then turn over the accrued amounts to the lender to apply towards any remaining balance.

I would also inform your tenants in writing, that you are letting the houses go in foreclosure and that you are converting the lease to a month to month lease to allow them to find other accommodations.

You might also check to see the lender will allow an assignment of the mortgage. Maybe the tenants can purchase the property by paying the arrears and assuming the mortgage. This lets you off the hook and allows them to pick up the home at a bargain.

No, you have no requirement to pay the bank, your legal agreement with the renter is that they pay you the rent for living there, That is a separate agreement than yours with the bank. ** except as noted in California

Now of course the tennans need to be told of this, and perhaps allowed to break a lease with you if they want to move. ** not that you have to, but it would only be a moral thing to do.

Also remember when these do go back to the bank, they will be given notice to move, often a short notice,

Also you will have to give them all back their deposits.

Double check your loan and make sure there's no "assignment of rent" clause. I'm wondering from your description if you're dealing with a multi-unit property. If so, many commercial loans contain such clauses.