It is a seller’s market when it comes to the United States housing market right now. But with the equally high number of properties in distress (i.e. homes that are being foreclosed on or being sold to satisfy bankruptcy filings), it is also a good opportunity for you to invest in an income property or buy a home if you are careful and take the right steps. If you are thinking of buying a bankruptcy property, read some of our top tips below and fill out a form for a free consultation about buying a bankruptcy property with Moshe’s Law, bankruptcy attorney office.
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So you are interested in exploring buying bankruptcy property. There are several ways to research properties in your area you might be interested in. These are some of the more common methods of searching:
NOTE: If you find a property in your area, be aware that buying one is not as easy as it seems. If the bankruptcy was filed in one place, but the person owing the debt owns a property in another state, the sale of that latter state property would take place in the state the bankruptcy was filed in.
If you find a property you’re interested in, it’s a good idea first to find out what type of bankruptcy was involved. There are three main types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13.
In a Chapter 7 bankruptcy, the property is managed by a Chapter 7 trustee. The debtor/owner has no say in how the bankruptcy property for sale is disposed of. It’s in the trustee’s best interest to maximize the potential and as a result more likely to do everything by the book rather than do an “under the table” transaction. This means most likely the property would be listed the same way as many regular homes or properties are listed for sale, but would still be dependent on a court to discharge the sale.
Chapter 11 and Chapter 13 bankruptcies are a bit more involved. They involve the reorganization and proposed pay-off of a debtor’s debts. This includes the sale of a property to go toward satisfying a debt. However, while the Chapter 13 trustee oversees the property, the house or other property may go back to the original owner contingent upon approval of the plan to restructure a person’s debts. The debtor may not also have clearance to sell the property, pending approval from the bankruptcy trustee.
In a traditional real estate transaction, there are protections in place to safeguard the buyer. Bankruptcy and foreclosure sales operate differently. They are structured to provide safeguards to the seller/creditor and /debtor since the end goal is to ensure the creditor comes out with no after-transaction liabilities.
The buyer has much fewer protections in these types of transactions. The buyer does not have the usual protections like warranties, contractual obligations on part of the seller, inspections and deliveries of due diligence, as well as delivery of a clear title at the closing of a property sale. Often the buyer is buying a house with bankruptcy from someone who owned the property but did not reside in or use it. There are no firm plans for inspections in buying bankruptcy property as with a regular sale. There are not the normal due diligence and title obligations as with a regular sale. Most important of all, there is no guarantee the prospective buyer is locked in for a purchase, especially if the prospective buyer is outbid on the property.
But it’s still possible to safely go about buying bankruptcy homes if you take time to examine the needs and obligations of the owner and other lenders & creditors. You can reach an understanding with the bankruptcy trustee regarding inspections, due diligence information and getting a title policy if you are successful in bidding and buying a property.
Practically all properties in liquidation involve a loan. On most occasions when buying a home during bankruptcy, those home loans are upside down, and the banks stand to sell the property at a sometimes substantial loss. At the point when the trustee acknowledges your offer, they will notify all lienholders on the home of the proposed deal. This allows loan specialists an opportunity to state any problems they have with a proposed deal in an effort to protect against and mitigate any loss from the property being sold for short of what they might want.
Banks will make their own evaluation of the home and what they are owed. They utilize this information to sort out what their possible returns will be if the home gets dispossessed as opposed to being sold by the bankruptcy court. In the event that the liquidation offer is excessively low, they will protest and move forward with foreclosure. The bankruptcy court is meant to protect the interests of the creditor, not getting you an incredible deal. So the potential for foreclosure is very high.
On the off chance that you discover a bankruptcy property that you want, contact or have an attorney contact the bankruptcy trustee. You can find the name of a trustee on the website www.pacer.gov, while the contact information is on www.justice.gov.
The trustee might be keen on selling the property. Once in a while, if the trustee can sell the property without an intermediary, they might lean toward giving a bigger share of monies to creditors by bypassing the cost of a traditional broker. A real estate attorney may be able to help you understand the terms and conditions necessary to secure the trustee’s consent and bankruptcy court’s approval.
Some may wonder if a bankruptcy trustee and foreclosure trustee are one and the same, but there are differences between the two.
A bankruptcy trustee possesses all of the rights in the borrower’s property under the meaning of property of the estate in Section 541(a) of the Bankruptcy Code. The trustee is mandated to “gather and diminish to cash the property of the bequest for which such trustee serves, and close such domain as quickly as is viable with the wellbeing of gatherings in revenue.” 11 U.S.C. Segment 704(a)(1). Trustees get paid a commission on installments to banks, and they need to offer property to pay creditors.
They sell property by discovering purchasers, haggling with lenders, and filing lawsuits in court to combat invalid liens, declaring financial insolvency for claims to consummate title or to oppose apparently invalid liens on property. A foreclosure trustee is much simpler, only being tasked to begin the sale under the terms of a trust deed at the lowest proposed bid. And they can ask for no more than they are owed for the property.
There is a way for a purchaser to make an offer on a prospective bankruptcy property. It is called a “stalking horse” offer. It’s in effect, an advance reserve bid ahead of an auction or sale. The intent is to maximize the value of its assets or avoid low bids, as part of a court auction. The buyer is then introduced to the Bankruptcy Court as the proposed purchaser in a movement to endorse a deal under 11 U.S.C. Section 363. Not only should the bid be adequate, the terms should likewise be adequate.
An all cash offer is your best bet for securing the desired bankruptcy property and a bankruptcy court equity sale. But if the buyer can get a loan to cover the cost of the property through escrow after the sale is approved by the court, it is deemed an acceptable substitute for an all-cash offer.
The more contingencies on a sale, the greater potential that you run into roadblocks in your efforts to buy a bankruptcy property. Plans for financing or repair work or arranging inspections may deter a trustee from accepting your offer. And such contingencies may require court approval anyway.
A trustee generally cannot sell a property without complete payment or permission of the lender to accept less than what is owed unlike a foreclosure trustee who can sell the property at a set price. The bankruptcy trustee’s total cost includes all liens, sale and administrative costs among other things.
Buying a property as-is at a foreclosure auction with no refunds if the property is not what they expect, can be a risky business. But there are some protections in bankruptcy sales; the bankruptcy trustee will many times open an escrow in which they deposit the deed and the prospective buyer deposits the needed money and does away with the contingencies. Buyers are invited to work out purchase conditions, including property inspection and time to due diligence to make sure all issues are taken care of.
A bankruptcy sale will contain rules for overbidding as outlined in a court sale motion. An overbidder is a potential buyer of bankruptcy property who requests to pay more than the proposed buyer identified by the bankruptcy trustee in the sale motion.
Be sure to learn about a given hearing’s procedures for overbidding. You can do this by reviewing the sale notice filed by the bankruptcy trustee. The sale notice will provide instructions on any pre-qualification. When it is time for the auction, the judge will call the case and then ask if there are any overbidders present at the sale.
The court will generally approve both the highest bidder, at the highest bidder’s price, and a backup bidder, at the backup bidder’s highest price. This is done so that no further court order is required if the highest bidder decides not to purchase the property for any reason. This allows the bankruptcy trustee to sell the property to the backup bidder without any further court order.
Yuriy Moshes is a real estate attorney licensed in the state of New York who knows the ins and outs of New York real estate law. Over the years, he and his staff of dedicated attorneys have helped homeowners stay in or sell their homes when circumstances dictated.
He has also assisted clients in navigating the ins and outs of commercial and residential property buying and selling to ensure the smoothest transactions possible. If you are considering buying a property sold as part of a bankruptcy agreement, contact our team of qualified bankruptcy property attorneys before you do anything else.