Lessons from the Pros

Real Estate

Heard of Rent Skimming?

“Rent Skimming” is defined as: An owner collecting rents and deposits on property without making payments on the loan and pocketing the rents.

In the economic climate we’re coming out of, my concern is that if a property is in foreclosure or the owners are planning on letting the property go into foreclosure soon, individuals could find themselves having paid rent but not getting credit for it. What recourse would a tenant have if they are evicted by the bank because there are no rent receipts for their unit, but they paid.

If we frame the situation as strictly a legal question the matter is straight forward at least in CA (yes even in CA!!).  It is illegal under two sets of circumstance: (1) Collecting rent(s) and failing to make mortgage payment(s) during the first year of ownership or (2) Collecting rents under the guise of authority – i.e. property manager and then not paying the mortgage.

So under CA law if the property has been owned for more than one year, the action would not be illegal but it would still be considered “rent skimming.” It would also not remove the legal obligation for the tenant to pay rent under the terms of the rental agreement. Other states laws may differ, but my research shows that none make it simply illegal to collect rent(s) while not making the mortgage payments.

Now a good lender will have an “assignment of rents” as part of the loan package.  So that if the landlord is late on the mortgage payment the lender can take over collecting the rents legally.

But what about the ethical question?  Has the property owner acted unethically toward their tenant?  Would it be ethical for the tenant to stop paying the landlord if they knew the landlord wasn’t paying the mortgage?    In a New York Times article, Ariel Kaminer known as the “The Ethicist” responded this way to the question: “Unless you agreed in advance that the landlord would forward your check directly to the bank, I’m afraid the tenant wouldn’t have had much of a case for freeloading.  The landlord’s dereliction could not have justified the tenant’s actions.”

Think about it, say we look back to when the Dodgers owner was in Bankruptcy, do you ask the hot dog vendor if the Dodgers have paid their bill?  And if they said no would you expect to get your hot dog for free. No one would think of doing that.  So why is it different with rental property?  Because it’s so personal. Tenants have a great deal of emotional and social investment in the place they live.  Having to move can be a major disruption and expense. Imagine having an auction notice posted on your door, or an agent showing up to do an appraisal for the bank, as a tenant that can be very disconcerting.

Is rent skimming (in the generic, not legal the sense) unethical as between the property owner and the tenant?  The answer, I believe is yes, but also it depends on the expectations that have been set between the property owner and tenant.  It is, as are so many things in real estate, a question of disclosure.  Collecting rent while letting a mortgage slide into serious delinquency, without informing the tenants, is not illegal.  But it’s wrong.

On the other hand, if the tenant is informed and understands, how is he or she wronged?  The lesson is that our actions do affect others.  In a landlord tenant relationship, we have an ethical obligation to communicate those things that will have an adverse effect on the lives of our tenants.

Great Fortune

Diana Hill


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