Many so-called foreclosure experts tell you to never rent a property to the former owner. we disagree. In fact, we encourage you to seek out opportunities that will allow you to rent to the former owner.
Tenants, as a group, come in all degrees of financial responsibility, and a broad spectrum of good or bad property caretakers. You have to evaluate each one, and you can take nothing for granted. It is the same with former owners of foreclosed real estate.
Remember, many former owners were not irresponsible. They just found themselves in a financial bind they could not work their way out of. Often, it was the accumulated past due payments after a short-term money problem that was their downfall. They could have made the monthly payments on the home, but they could not catch up on the arrearages.
You might wonder why the former owner did not talk to his or her lender and work out a payment plan for the arrearages, or why he or she did not file for Chapter 13 bankruptcy. The answer is usually fairly simple. Most people do not know their lender will work with them. They become scared, do not return phone calls, and do not even open mail from their lender. They are headed for a train wreck called foreclosure, with no clue how to stop it. Many will avoid bankruptcy because of the stigma, the invasion of privacy, or they believe (correctly) that a foreclosure will drop off their credit record before a bankruptcy does.
In our experience, former owners make long-term, stable tenants who take good care of the property. They are already emotionally invested in it, and they consider it their home, not a rental house. Especially if they have children, they are very motivated to keep as much as possible normal in their lives, despite recent financial turmoil. Obviously, this strategy will not work for postforeclosure purchases because the former owners have already moved on.
Other than former owners as tenants and the opportunity to buy at less than full market value, foreclosures do not have any special considerations for rental income investors.