Buying at Bankruptcy Auctions
Buying At Bankruptcy Auctions
Bankruptcy sale properties are probably not as well known to be potential sources of properties as are foreclosures and tax sales. However, they can be a good source for acquiring good properties at under-market prices.
Bankruptcy is a legal procedure handled by the federal judicial system. Bankruptcy cases cannot be filed in state court. Each of the 94 Federal Judicial Districts handles bankruptcy matters, and in almost all districts, bankruptcy cases are
filed in the Bankruptcy Court. Although bankruptcy is a federal matter, state laws affect certain aspects of the matter such as exemptions regarding what assets can be retained by the debtor. Sale of real estate occurs when a person or
business entity files for bankruptcy under a chapter of the Bankruptcy Code that provides for sale of assets, usually Chapter 7, with the proceeds of sale being applied against liabilities of the debtor.
When a Chapter 7 petition is filed, the U.S. Trustee (or the Bankruptcy Court in Alabama and North Carolina) appoints an impartial case Trustee to administer the case. The primary role of a chapter 7 Trustee is to liquidate the debtor’s
nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. The Trustees are assisted by attorneys, accountants, appraisers, real estate brokers, and other necessary service providers, all
being paid out of the assets of the one who files bankruptcy. Real estate is usually sold at auction through a real estate broker who is licensed in the state where the property is located. The broker is responsible for marketing
the property and conducting the auction. The broker receives a percentage of the sale price, some of which might be shared with a broker who represents the successful bidder.
Exempt assets are those of the debtor’s assets exempt under the Code or are subject to valid liens, for example, a mortgage or IRS lien. Nonexempt properties, both real property and personal property, are almost always sold at auction.
This mode of liquidation is considered most likely to result in the highest sale price, thus, most likely to maximize return to creditors.
There are specific procedures that must be followed, including providing notice to the public and conduction of the actual auction. The listing real estate broker and auctioneer (often a different person) do not warrant the accuracy of any of the information provided about the property. Registered bidders are advised of the requirements in advance of auction day and on auction day. However, announcements made from the auction block will take precedence over any printed material provided or any prior oral statements made. In the event of any dispute between bidders, the Auctioneer’s decision will be final. The Auctioneer has the right to refuse admission or ask an attendee to leave the auction. The Auctioneer
also has the right to withdraw or add any property to the auction.
The auction will take place on a specified advertised date and may take place on-site of the subject property or at some other specified location. Usually, prospective buyers must register in order to bid at the auction. Registration may be allowed on the day of sale or be required by some date prior to that day. A specified deposit (cash or cashier’s check) is usually required to receive a bidder’s number on the day of the auction. This deposit is typically in the range of $500 to $1,000, but may be significantly more for larger properties. The funds must be cash or certified funds, usually made payable to a specified title company. This deposit will be refunded to all unsuccessful bidders immediately after the auction.
For parties interested in purchasing the property, but unable to attend the auction, arrangements can usually be made to participate by phone or written bids or via an authorized representative.
Bankruptcy auctions require a significant deposit upon successful bid, and require short escrows. As for foreclosure and tax sales, properties are sold “as is.” Usually, no contract contingencies for financing, inspections, or other due diligence tasks will be accepted. One must complete all inspections and other due diligence and have their financing ready to go prior to the sale date. Terms are cash to the Court. The properties will usually be available for inspection by appointment only. The potential bidder may utilize professionals in performing due diligence.
It is strongly recommended that all prospective non-cash purchasers pre-qualify themselves prior to auction. If closing is delayed by actions or failure to comply with these auction terms and conditions by a Successful Bidder, default may be declared and the earnest money deposit may be retained by the Trustee.
There may or may not be a minimum or reserve bid on the property. The successful bidder (buyer) will usually be required to immediately make a deposit, usually about ten percent (10%) of the total contract price. The deposit must usually
be a cashier’s check, or by wire transfer. This deposit is usually non-refundable except if the sale is not approved by the Court.
The successful highest bid will be subject to Court approval. However, as the major benefit of an auction is to obtain the highest possible sale price in a given market, the high bid will usually be approved by the bankruptcy court.
The balance of the price must usually be placed in escrow within a short period after the date of sale, often in the range of five to ten business days. Unless creditors chose to dispute the facts of the bankruptcy, most proceedings
regarding real estate involve a Judge only in that he usually approves (1) the price and terms of sale, (2) the terms of the listing with a broker, and (3) the actual sale to the successful bidder.
Close of escrow will be scheduled for as soon as possible thereafter, usually based on the Trustee’s estimate of the time required for Court approval and typically on the order of 30 days.
The Court will usually deliver title free and clear of secured liens as well as any other valid liens of record, but subject to tax pro-ration, restrictions, reservations, and easements of record, zoning, environmental protection, and other municipal, federal and state laws or facts which an accurate survey and/or inspection of the tract being sold might show.
A preliminary title report is often available for inspection prior to the sale. However, if not provided, a potential bidder should certainly invest in the cost of obtaining one. Often the buyer must pay all escrow and closing costs,
including an owner’s title insurance policy if one is desired (highly recommended). Property taxes will usually be prorated to the close of escrow.
There are advantages to purchasing a property from bankruptcy compared to purchasing a foreclosure or tax sale property. One is that there is usually little risk of the property being withdrawn prior to sale due to curing of defaults. Another
is that there is no redemption period after completion of the sale. Another possible advantage is that the properties available from bankruptcy auctions are sometimes in better condition than from foreclosure or tax sale auctions,
partly because the Trustee may be willing, if funds are available in the bankruptcy estate, to invest a little money in order to maximize the sale price.
However, bankruptcy income properties usually have problems. In fact, this is sometime one of the reasons why the owner filed bankruptcy. One possible problem is high vacancy rates, even zero occupancy. This is, of course, usually more of a
problem the larger the property. It is also usually a bigger problem for commercial properties compared to residential units. This is because commercial financing is usually more difficult to obtain, particularly for a low occupancy
property, and because it can take longer to rent up commercial units compared to residential units. However, as the difficulty of renting vacant units is directly related to the rent for units of a particular quality in a particular
location, the risk depends on the price being paid for the property.
Although, as mentioned earlier, bankruptcy properties are sometimes in good condition, such is not always the case. Some properties may have serious deferred maintenance issues – after all, if the owner had insufficient funds to avoid
bankruptcy, he may have been unable to properly maintain the property for quite some time. However, this is not necessary the case for all of a given bankrupt owner’s properties being sold. The degree of deferred maintenance often depends
significantly on the time period of the owner’s descent into bankruptcy.
If specified in published auction information, a commission will be paid by the listing broker to a licensed broker who represents the buyer for the sale. To qualify for the commission, the broker or salesperson must usually register as
the prospect’s agent by some specified date prior to the auction. Furthermore, the licensed broker or salesperson must usually accompany the prospect to the auction. Some of the requirements for a particular auction are set by the
Bankruptcy Court Trustee and some by the listing broker.