Word-of-the-Week: Rent skimming

A residential property occupied by tenants is the subject of rent skimming when delinquent mortgage payments occurring during the absentee owner’s first year of ownership are not cured and the property is sold at a foreclosure sale.

Rent skimming occurs when, during their first year of ownership of a parcel of residential real estate, an absentee owner investor:

receives rents from tenants; and
fails to apply the rents towards the mortgages encumbering the property, causing a mortgage delinquency and eventual foreclosure. [Calif. Civil Code §890(a)(1)]

Thus, a property needs to go to foreclosure as a result of the failure to pay the mortgage to classify the series of events as rent skimming. However, it is the date of the delinquency of at least one month’s payment on the mortgage during the first year of ownership that triggers application of the rent skimming penalties, not the date of the foreclosure sale.

For example, consider an investor who skips a mortgage payment during the first year of ownership. In the months following, the investor makes some mortgage payments but does not cure the delinquent payment, known as a rolling late payment. After owning the property for more than 12 months, the investor stops making payments and the property goes into default, and is eventually foreclosed upon.

Here, the investor is engaged in rent skimming activities due to the initial delinquent payment occurring within the first year of ownership, triggering the eventual foreclosure sale.

When delinquencies occur in mortgage payments within the first year of ownership are cured, later delinquencies in payments occurring after the first year of ownership do not constitute rent-skimming activities. [CC §890(a)(1)]

Rent skimming rules apply per parcel of residential real estate, defined as one or more residential units located within the boundaries of land with a single legal description.

Investors expose themselves to civil and criminal penalties depending on the level of misconduct set out in two categories of rent skimming:

single acts of rent skimming; and
multiple acts of rent skimming.

Single acts of rent skimming subject the perpetrating investor to civil penalties for their conduct, not criminal prosecution.

However, an investor who engages in rent skimming on five or more parcels, all acquired during a two-year period, is also subject to criminal penalties for multiple acts of rent skimming. [CC §890(a), (b)]

Relatedly, rent skimming also occurs when an individual collects rent from the residents of residential real estate when that individual, without the consent of the owner or owner’s agent, asserted possession or ownership under a false claim of title, trespass, or other unauthorized means. [CC §890(a)(2)]