Guest post by Frank Simon, Simon PLC Attorneys & Counselors
When a property is in receivership, it is a property that likely comes with many legal issues. The ultimate goal of a receiver is to keep the property or operations in good order and stabilize the value until a buyer is found.
But receivership is often misunderstood. Even the most sophisticated investors may be reluctant to consider buying a property in receivership because they believe a property in receivership must be unusable and undevelopable. After all, if the property was valuable, the owner would have sold it himself or herself, right?
That misconception is unfortunate because some of the best investment property deals are those in receivership, as the properties are usually deeply discounted to facilitate a speedy sale.
The truth is there are many reasons for receivership, and it is rarely because of the property’s viability. One of the most common reasons a property goes into receivership is that the owner failed to pay the property taxes. In my experience as a receiver for hundreds of properties, the reasons for tax payment failure are numerous including:
- The owner is juggling and trying to maintain several properties and is behind on taxes.
- The owner is going through a divorce or other personal issues and is not paying attention to ownership responsibilities.
- The owner died and either there is no designated heir or the heir(s) failed to pay taxes.
The above reasons also explain why some properties are neglected and go under despite a property’s worth as an investment. Mismanagement and neglect can make a valuable property unprofitable.
Many times, a property in receivership just needs the right use or solid management to be viable again.
One good example in my experience was an office complex that was neglected for years. The disrepairs and lack of property maintenance drove most of its tenants away. With only a handful left, the 60,000-square-foot property wasn’t profitable, and the owner was in over his head. The property went into receivership and a buyer bought it at a deeply discounted price. The new owner improved its interior and exterior and started maintaining the property’s appearance and operations. Today it is almost 75 percent occupied and is on the market for four times what the new owner paid.
Besides the probability of a good financial deal, another benefit of buying a property in receivership is that the property is “free and clear.” The act of receivership cleans the slate for the new owner, so there are no liens –tax or otherwise – for the new owner to worry about. When the court orders a sale of the receivership property, they are ordering a free and clear sale.
When buying a property in receivership, there are a few caveats investors should follow. One is that a potential buyer will work with the receiver directly. The receiver is appointed to deal with any offers for the property. Every receivership sale has its own requirements through the court, which depends on whether or not the lender is involved, and the receiver is charged with fulfilling those requirements.
A potential buyer should also check out zoning to ensure that the planned use of the property is permissible.
Buying a property in receivership is not the risky venture most investors think it is. With the right management and use of property, an investor can obtain a commercial property at deep discount that will yield profits for years to come.
Frank Simon is the founder and managing partner of Simon PLC Attorneys & Counselors of Bloomfield Hills, Michigan. In addition to the firm’s Michigan headquarters, Simon PLC has offices in Arizona, Illinois, Florida, New York, Ohio and Texas. For more information visit www.simonattys.com.