What does it mean to buy property in receivership?

Mortgage defaults and delinquencies are common. Distressed properties account for nearly one-third of residential transactions. Foreclosures, short sales, banks’ REO (real estate owned) and bulk sales have become terms and methods for purchase and sale.

The newest member to the party is the receiver sale, or receivership, which has been increasing the past few years given the condition of the financial markets. In a nutshell, a receivership is an alternative to a foreclosure proceeding (where a lender takes ownership of the project) or a bankruptcy proceeding (a trustee takes control of the project).

Receivers are court-appointed individuals given custodial responsibility of a property that serves as collateral for a loan in default. Receivers displace the property owner as the active property manager and make all decisions regarding management and operations. These often include making improvements, completing construction and getting the property ready for sale. The court order appointing the receiver spells out the receiver’s authority.

“A property in receivership can present a more appealing situation for several reasons,” said Kevin Hanchett, an attorney and principal in Edmonds-based Resource Transition Consultants, LLC (www.rtcreceivers.com), a company specializing in real estate and small-business receiverships. “There’s more control than in a short sale or a foreclosure and purchasers can use standard financing.”

Hanchett’s group was appointed by the King County Superior Court to take over control of The Sanctuary, 12-unit multifamily community project on Seattle’s Capitol Hill. Originally built in 1908 as The First Church of Christ the Scientist, the church was converted into a residential project a century later. Stalled in construction in 2010, the court supervises the receiver and approves the construction and sale of each home.

The court order approving each sale confirms that the buyer is receiving his or her home free and clear of all liens, including those of contractors or lenders. After the homes are sold, the receivership proceedings will terminate. The buyer’s rights, including any warranties, are defined in the purchase and sale agreement.

A primary benefit of buying through a receivership often is value. Before a receiver is appointed, developers often resist resetting pricing in an attempt to save some or all of the equity invested in a project. When a receiver takes over, the receiver has the authority to reset pricing based on market conditions rather than the original investment costs. The reset pricing is often substantially lower than the original asking price.

Receivers’ fees, as well as any fees for third-party professionals they hire, typically are paid with available cash from the property’s sales or, in the case of a commercial property, rents or operations. If the property is cash-flow negative, the lender generally must pay for such fees, which can then be added to the defaulting borrower’s principal loan balance.

Generally a receiver sale is far more direct and expedient than a short sale. A short sale requires a lender to accept a purchase price that’s lower than the mortgage value, which can be a very protracted exercise and sometimes results in no sale at all. A receiver sale typically has a set price and legitimate offers accepted by the receiver usually are approved by the court.

The court approval process takes about as long as the buyer’s financing approval. The deal then closes much like a traditional real estate transaction.

Mortgage lenders may choose to use receiverships on larger tracts and projects instead of foreclosures for several reasons. A major one is that the costs and liabilities associated with foreclosure can be long, drawn out and expensive.

For example, a foreclosure can take several months and involves a great deal of legal and administrative fees. In addition, the borrower in default maintains control of the property until the foreclosure is completed. This can substantially increase the risk of additional costs.

According to Hanchett, receiverships have been on the rise in real estate and business. Lenders are allowing borrowers additional time to raise capital or sell assets, so long as the collateral is being overseen by a receiver. Defaulting borrowers and their lenders are agreeing to receiverships so that feasibility studies and appraisals can be conducted and, when appropriate, stalled projects can be financed and completed.