Seller files BANKRUPTCY at 11th hour on apartment complex. How do I work with the Seller?

Question

I have an apartment complex (150 units) in Texas that was offered at great discount from a Seller that was in default. The complex was up for foreclosure today (1st Tuesday -March).
          
          I got offered the property about a week ago. The Seller's Broker was working with the Seller's bank and the Bank had agreed to accept short sale offers on the property.
          
          We presented the offer over the weekend, but the Seller stopped taking calls from his Broker and my offer was never presented to the Bank.
          
          Basically, the Seller no-showed for the last 72 hours so the property went to foreclosure at 10am this morning....or so we thought.
          
          It seems that early this morning the Seller filed bankruptcy on the complex and has tied up the property in the courts.
          
          I still want to buy the complex and think the Bank will take my number, the Seller has tied it up with a bankruptcy.  Per one of my old RE mentors, the deal is not gone but it is out of action for up to 8 mths.
          
          Any advice on this situation?
          
          If I get the Seller to still sell the property and walk from his property, what is motivation (besides giving him big $$$ to walk)?
          
          What is the Bank's position?  Trustee's position?
          
          NEED ADVICE!

Matt Mathews · Answer

First of all.  Bankruptcy stops any foreclosure. A question to ask is;  What type of Bankruptcy was it? 7, 11, 13 etc.  If it was a 11 or 13.  Chances are the seller may be able to keep the property.  If 7 (total liquation) then the courts have control over the asset-not the bank.  Even if the Lender pre-approved the sale-it now will become null & void until bankruptcy court rules.  That goes for the sellers attorney as well.

Bill Gulley · Answer

Hi Matt, Yes, that's what I was eluding to, regardless of the type of bankruptcy the foreclosure stops. The court will decide. In Chapter 7, the personal residence will be effected by the homestead exemption. If it was a non-owner occupied home held in the business, they can sell it off as well.
          
In the bankruptcy the two types of creditors are viewed differently, secured creditors and unsecured creditors. Secured will be given preference to the collateral interest, unsecured gets what ever is left over. Along the lines of preferred stock and common stock in Chapter 7.

From my experience as a Registered Creditor's Representative in Federal Bankruptcy Court, the contracts that were entered into prior to the filing and which have yet to be performed are contingent liabilities of the Seller. The contrcat can not be closed without court approval. The question the court will have is the market value of the property, mainly, if the is equity available for other creditors. If the equity exceeds the exemptions that can be allowed by the court, they will try to seel the property for the benefit of others. If however it can be shown, that there is no significant equity, that there is insovency, the attorney can present that information on behalf of the client. A short sale package, if any, would be good evidence of that, especially the BPO. Then the attorney can present the contract and ask that the contract be approved and that the court approve the proposed sale. If the court approves that request, even prior to finalization of the proceeding, the property can be sold.

There is also another aspect of the bankruptcy and foreclosure. The court can also do what is called a "cram down" which is a reduction of the principal amount on the loan. Variations of this have been used for about 25 years that I know of and recently (last year) congress attempted to reinstitute this provision as a more favorable method to deal with foreclosure, but according to my Senator, Senator Clare McCaskell, it did not pass. But it is still an option for the court. This could mean that the court could set aside the contract, or allow it, lower the principal and provide amounts for the benefit of other creditors. But, this is really unlikely. The Carm Down is usually reserved for preditory lenders found to have taken advantage of borrowers, sort of a punishment or fine for their actions.

I hope I clarified my statement, I think we were saying the same thing Matt. Good luck, Bill

Bill Gulley · Answer

Kyle, your offer should go to the bankruptcy attorney at this point. The owner is under no obligation to sell at this point unless the court orders the sale. If the BK attorney has an offer he should be communicating that to the court and the intentions of his client. The bank will weigh in as well and may say they would accept the offer. At that point the court will consider the deal, sell it or allow it to be kept if the bank is taken out of it. Not likely, IMO, that a guy is going to get financing while in BK and prior to any discharge, must be family money, and that loan will also need to be approved! Good luck, keep us informed...Bill

Bill Gulley · Answer

Hi, thanks for the reminder as to it being 150 units, lol. You should really contact your seller and see what his intentions are and go from there. There are many issues going on here. His power play? He probably does not have one, probably best to sell it, especially if the bank had agreed and again as I said, if the court will approve it. If it's anywhere near FMV the court will probably approve the deal. When he files, his cash flow might go to an escrow or a portion of it, depends on the court. I'm not an attorney, but if you want some ideas you can contact me, it would be pages like this! Good luck, Bill

Kyle King · Answer

Thanks Bill.

(Just a reminder. This is a commercial property. 150 unit apartment complex.)

I was thinking of contacting the owner and ask him what his plans are.

But I was unsure of what he could do.

If he has 'no money'...can he save the property, w/o adding a 'investment partner' with cash?

If he has 'money', how much does he need? Do he have to pay back the bank in full and get a new loan?  Is the bank willing to sell to him at discount? Why?

I've worked in RE for over 10 years and negotiated a number of complicated transactions, so the RE side is not the problem...it the LEGAL side.

Where is HIS power?  vs.  He does not stand and chance ...therefore is just prolonging the eventual sale of his property.

Bill Gulley · Answer

Hi, you can still buy it. You'll need to get with the seller and perhaps explain that you would like to contact his bankruptcy attorney, or if you already know who it is, all the better. See the attorney and explain that the bank is willing to take that number. Support you offer with your short sale package to that attorney. He or she will then present that at the proceeding and if the property does not seem to have equity available for other creditors and the property is above the homestead amounts, the court can approve the sale. You can simply ask the bankruptcy attorney if they would present the sale for approval. Bad news, the attorney may want his client to live there free for a few months, that depends on your seller. And, you can't offer more on the deal or do anything outside of bankruptcy, so don't go there it will get you and your seller in trouble and his bankruptcy can be disallowed as well as face fraud charges, not good. Good luck, Bill

Joel Owens · Answer

From my experience most investors are having much more success buying the note pre-foreclosure.

One reason is you buy the note and then for waiving the deficiency against the seller they sign over title to you. Saves foreclosure costs and eliminates redemption rights and timelines which vary from state to state.

150 units for 700,000 is dirt cheap. You are at about 4,667 a door before your value-plays.We have some at that level here in Atlanta but the areas are really bad. You would have to hire security at night and build in costs for that while repairs are ongoing. Otherwise just like houses in Atlanta as soon as you start fixing they strip,and strip again delaying fixing time and costing extra labor for re-installs and tens of thousands in replacement parts.

With the c properties or older usually those are held long term and not for improvement and flips. Many investor groups won't buy that age because of difficulty of exit strategy upon resale. When apartments start getting really old the exit strategy is usually a tear down and JV equity interest with a development group or to sell outright.

When the seller files BK the reasons might be for not just that property but the overall picture.

Kyle King · Answer

The long awaited update:

(Sorry, about the delay. Business is crazy.)

Ok.  I spoke by phone with the US Bankruptcy office here in Dallas and through a records search found the filing record and the attorney, for the Owner.

Per the courts rep, I was told that there is no trustee and the attorney for the Owner will be handling all papers work for the time being.  So I had intended to call the attorney and present my offer, but put that on hold. (see below)

At the same time, I have been working with the Bank (note holder)  on  purchasing the note, at discount.  Again, the original note was $2.2 mil. It had been reduced to $1.2 and was now non-performing.

With the poor condition of the property, I was offering to purchase the note at $700,000 and then I would worry about foreclosing & the current bankruptcy.

I made my offer on the note to the bank and waited about a week on their counter.

OUT OF LEFT FIELD!!!   My offer was denied and the bank took another offer from a new buyer at NET $1.0 mil to the bank.  Up until I was told about the new offer and new buyer, I had no clue that the bank was working other buyers.  Sh*t!

As of this posting, the note is under contract with the NEW buyer and the bank expects to close soon.  I've continued to keep in contact with the bank as a back-up buyer, but I'm not expecting it to come back around. This is a solid deal and if the buyer is strong it will be gone.

Hindsight:  I thought about buying the property from the Seller, out of bankruptcy, but I would be paying TOO much (min. $1.2 + bank fees) and have decided to move on.

Hindsight #2:  Haste makes waste!  Don't delay in wrapping up and closing on GOOD deals.  There is always someone waiting to buy a good deal.

Good news:  Found a MHP in a similar situation. No bankruptcy filings, bank contact is a straight shooter, and I expect to wrap things up soon.

Buying MHP at 40% of Value.  and it comes with extra land to expand.

Thanks everyone for the advice.  The BP spirit is alive and well.

Kyle

Scott Hubbard · Answer

A few additional points to take into account here.  
                              
                              1).  A personal bankruptcy is taking 9 months.  A business filing involving RE will usually be longer.
                              
                              2)  Even if this filing is specific to one entity it does not mean it will stay this way.  You should find out from the BK filings if he has a PG or a cross collaterized loan involving other assets he owns.  This could easily mushroom.  I was invloved in a business aquisition last year that ballooned from one entity to ten other businesses as well as a personal BK.
                              
                              3)  How many lienholders are there?  Are there Mechanics', Prop. taxes, IRS, UCC's?  How about service contracts including property managers?
          
          Generally, the more people at the party, the less food there is to go around.                    
                              There is a lot of due diligence you can do and it can become very expensive.  So, before you spend money, I recommend having a sit down with the seller as others have recommended and figure out what he wants out of this.  If his motivation is to keep the asset, then it could be a long painful and expensive process for you.  If he wants to dump it, then communicate with the attorney (through yours) to include your offer in the mix.  
                              
                     You will do a lot of waiting.... too!

Kyle King · Answer

Thanks Bill/Matt.

Great stuff. This will be a big help.

Let me digest your thoughts and I'll give the Seller a call.  Hopefully I'll have an update later this week.

Kyle

Seller files BANKRUPTCY at 11th hour on apartment complex. How do I work with the Seller?

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