With distressed properties at record levels, an increasing number of REITs and developers are turning to receivers to find bargains and lenders are turning to the same source to help salvage troubled loans. To acquaint the uninitiated with the process, we’re going to explain how buying from receiverships work and what buyers should know before pursuing this route to acquiring properties.
As in any real estate transaction, due diligence is essential to avoiding big missteps. When buying from a court-appointed receiver, you are buying “as is where is.” The initial step calls for a receiver to be appointed by the court at the request of a plaintiff in a pending court action. In the usual sequence a borrower defaults on the loan, and the lender (plaintiff) and borrower try to resolve the terms of the loan.
When the desired result fails to materialize, the lender may choose to appoint a receiver, pursuant to the loan documents and/or state law. The appointed receiver is an officer of the court and reports to, and is accountable to, the presiding judge. Next, receivers will request through a court order permission to sell the property, and all parties to the pending legal action will be notified of the hearing. The judge can grant this request or deny it.
Now, the receiver takes the property to market, either by directly selling the property or retention of a broker. A savvy receiver will locate all the due diligence materials related to the property that is available. Most of the appointing court orders require the borrower to fully cooperate in providing all available information.
The receiver now makes this information available to potential buyers. As the buyer, one has to ask: Does the receiver have the experience to know what should be made available and will it be made available? A smart receiver will comply since it is in his/her best interest to provide all the information upfront to avoid having the property re-traded or fall out of escrow because the buyer discovers heretofore unrevealed information during due diligence. Obviously, the receiver does not want to explain to the court why the information was not provided since the receiver “works” for the appointing judge.
The difficult part will be being able to sign the grant deed and get title insurance. So, the buyer’s first call should be to the title company to determine if it can deliver title or not. Having gotten permission to sell the property, the receiver should return as soon as possible with the executed PSA and inform the court. If the court now confirms that the receiver can close the escrow, the title company is so informed.
The receiver should have the title company approve the PSA form prior to taking the property to market. One of our firm’s practices is to attach a sample PSA to the LOI. While negotiating legal terms on the PSA, we attach it and require the buyer to acknowledge having read the PSA, which is one-sided in that no representations or warranties are offered. Why? Because the receiver is signing the Grant Deed etc. per the court order.
Once the property is sold, the Receiver closes the estate and is dismissed. Thus, the buyer has purchased an asset from an entity that, in essence, has been dissolved. If the receiver has followed protocol and had the court approve the sale, he or she has no personal liability. Should a buyer take this risk? If the buyer has done its due diligence? Obviously yes. Our firm, alone, has sold over $200 million of properties out of various estates in the past 12 months, the largest single transaction being $43 million for an apartment building purchased by Essex, one of the nation’s largest REITs.
Like all good real estate deals, the more experience both sides of the transaction have, the smoother the deal usually goes. And remember that if both parties to the pending court action want to sell and the receiver has a court order to do so, the escrow should close. The lenders do not want to own—and the borrower can’t afford to own. A final caveat: Be certain to have seasoned legal counsel who knows the law applicable to receivership estates.
Taylor B. Grant, founding principal of Newport Beach, CA-based Real Estate Receiverships, has served as the receiver for more than $750 million of commercial and residential properties. Among its major transactions last year, the firm recovered $108 million of real estate loans made by a consortium of lenders for which Bank of America was the agent bank.