Receiverships may be “The Unknown,” but They Can Benefit Everyone.
Real estate investors are always looking for good deals, but one word often makes them turn and run from a great price on a property. That word is “receivership.” Receivers are court-appointed individuals (officers of the court) 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, and eventually settle the loan. In some states, fulfilling receivership duties could include selling the asset during the foreclosure. While this particular duty often worries investors and property owners, the receiver would first make the request to the court to market the property for sale. The sale would never come as a surprise.
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 note holder’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. Receivers hold a neutral position (non-biased) and are motivated to do what is best for the asset. While receivers are responsible for making sure that the asset does not lose value, they also are likely inclined to find an accelerated timeline for purchase, 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 easier to mediate with than the original owner(s). Be aware, their responsibilities likely include selling the property at market value or close to it as possible, and they have the option of making improvements or completing existing construction projects before the sale. Buyers of properties in foreclosure receivership can use conventional financing to make their purchases, which sometimes is not an option when completing a short sale or direct foreclosure purchase.
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. There are potential pitfalls.
First, a borrower may file bankruptcy during the foreclosure process and put the case in bankruptcy court. A side effect of this – and often the primary aim – is 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 be unable to work with the receiver to purchase the property, but the real estate may fall into disrepair without the receiver to continue managing it.
Second, remember that a receiver has a neutral position and is a representative of the court only. 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 receiver’s end goal, not necessarily a sale to you. You only remain involved as long as you represent the best value to the interested parties.
Finally, some lenders specifically seek receiverships in order to avoid price reductions on a property. 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 note holder may avoid taking legal possession of a property. If a note holder has requested a receiver specifically to avoid the REO stigma, you may not be dealing with a situation in which you are likely to realize a lower price.
Understanding is Everything
You must understand the roles receivers play in the foreclosure process if you wish to pursue receivership leads as potential deals. Knowing the rights of the interested parties and the responsibilities of the receiver to those parties will be crucial to your ability to vet opportunities related to receiverships. In many cases, receivership should not be an uncomfortable word for investors, but instead one filled with promise.
What a Receiver Can Do
While regulations vary from state to state, receivers usually have the power and authority to:
1. Secure tenants and execute leases
2. Insure the property
3. Collect rents and profits from the asset
4. Employ counsel, custodians, janitors, and other help for property management where needed
5. Pay property taxes
6. Institute utility services
7. Open note holder accounts for operation of the property
8. 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.