If you do a deed in lieu what happens to the tenants living in the property?

Just like in a sale, the tennancy (Lease) continues to run it's course. Only the owner (presumably, landlord) changes. (The lease "runs with the property") The lender accepting the Deed in Lieu takes it subject to the existing lease, which (reading the agreement you'll make), you must tell them about.Be prepared to have them insist you get signed documents from the tennent saying what if any deposits he has and status of rent, etc. They may be happy it comes with a tennent, or they may want to buy him out.

More likely, a bank would be happy to take the proeprty with a tennent - who pays the rent - and have the cash flow.

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