Effectively Investing in Properties in Receivership
It Sounds Scary, but Receiverships Can Benefit Everyone in a Deal.
by Jim Paul
Jim Paul ( ALPS Group) is a court-appointed receiver in multiple states, a paralegal, and a CPM candidate. He can be reached at email@example.com.
Real estate investors are always looking for good deals, but one word often makes them turn and run at top speed from a great price on a property: receivership. Receivers are court-appointed individuals who have a fiduciary responsibility not only to the original owners of the property, who generally have fallen into some sort of financial misfortune, but also to the lien-holder on the property (often a bank), and any other parties with interest in the property, including the court. Receivers are generally appointed to help preserve the value of a property by preventing it from deteriorating due to lack of maintenance, addressing loss of rental income, preventing illegal activity on the property, and eventually settling the loan on the property. In many states, fulfilling receivership duties will include either selling the asset or asking a foreclosure or bankruptcy court to do so.
Receivership Should be Mutually Beneficial
In the case of receivership for foreclosure cases, it may seem to an outside party that the benefits are largely one-sided and center around getting a lender’s money out of the collateral property. In reality, a receivership can benefit the original owner of the property and the buyer, often an investor, as well. While receivers may not be quite as distressed as the original owner when it comes to making the sale, they are certainly still motivated to do so. Furthermore, while they are responsible for making sure that the asset does not lose value, they also are likely inclined to find an accelerated timeline for purchase attractive, which gives an investor an edge.
Because receivers make decisions regarding management and operation of a property but have no emotions vested in the real estate in question, they are often better to mediate with than the former owners. Their responsibility could include selling the property at market value or as close to. Also, they have timeline flexibility that an owner facing foreclosure does not, which means that they have the option of making improvements or completing existing construction projects before the sale, which can dramatically improve the state and value of a property before you make your purchase. Buyers of properties in foreclosure receivership can use conventional financing to make their purchase, which sometimes is not an option when completing a short sale or direct foreclosure purchase when time is of the essence.
Potential Pitfalls for Foreclosures in Receivership
A foreclosure receivership represents great opportunity for an investor, but do not allow yourself to get too excited about a deal before you understand exactly what your options are and how you can legally work with the receiver to do the sale. In a foreclosure process, a borrower may eventually file bankruptcy and put the case in bankruptcy court. A side effect of this – and often the primary aim – that the bankruptcy stays the foreclosure. If the receiver does not have existing authority to remain on the case in the event of bankruptcy, then they may be removed from the case or prevented – at least for a time – from maintaining the property once the owner files. If this happens, not only will you not be able to work with the receiver to purchase the property, but the real estate may fall into disrepair without the receiver to continue managing it. While a receiver can file a motion to remain on after bankruptcy, it is better if they are prepared before the bankruptcy occurs.
Secondly, you must remember that a receiver has a neutral position and represents the court, not the investor. In many cases, the appointment of a receiver will reanimate the borrower and the lender to possibly begin renegotiating with each other rather than simply avoiding communication or opting out of pursuing a resolution on the case. Resolution is the end goal, not necessarily a sale to you. The end result is that a receiver may act as a mediator between the lender and the borrower and expedite some settlement that leaves you out completely, so remember that you are only involved as long as you represent the best value to the interested parties.
Finally, while receivership in a foreclosure can indicate an opportunity to buy below market value on good terms in order to resolve the problem for the lender, some lenders have a very different purpose for appointing receivers. Traditionally, when a property is classified as real estate owned (REO), there is an immediate connotation of “reduction in price.” However, by appointing a receiver, a lender may avoid taking legal possession of a property and avoids liability for the sale. If a lender has requested a receiver specifically to avoid that REO stigma, you may not be dealing with a situation in which you are likely to land a lower price.
Understanding is Everything
Understanding what roles receivers play in the foreclosure process is the key for investors who wish to pursue receivership leads as potential deals. Knowing the rights of the interested parties and the responsibilities of the receiver to those parties is crucial to your ability to vet opportunities related to receiverships and determine if they are worth the investment of your time and effort. In many cases, receivership is not a scary word for investors, but instead one filled with promise.
[Sidebar] What a Receiver Can Do
While regulations vary from state to state, receivers usually have the power and authority to:
- Secure tenants and execute leases
- Insure the property
- Collect rents and profits from the asset
- Employ counsel, custodians, janitors, and other help for property management where needed
- Pay property taxes
- Institute utility services
- Open bank accounts for operation of the property
- Work with contractors to maintain and improve the property
Because receivers are tasked with stabilizing or improving an asset’s value, they have a great deal of responsibility. They must track their activities closely, filing reports for the court and all parties with interest in the property. In many states, a receiver can sell an asset without permission from the original owner. This is especially true in foreclosure cases.