Receivership Sales Can Be a Better Option for Lenders

Lenders faced with CRE loan defaults increasingly are looking to receivership sales—rather than workouts, deeds in lieu or foreclosures—as the most effective remedy, says James H. Donell, CEO of Los Angeles-based FedReceiver Inc.  Taking this measure, Donell tells Distressed Asset Investments, not only protects the value of a troubled property, but also reduces losses and limits exposure to liability.

Selling through a receiver means that a lender “does not have to complete a trustee sale and pay trustees’ fees,” which can be substantial, says Donell, who has been appointed as a state and federal court receiver in more than 500 cases since 1991. Also, this remedy eliminates liability not only for the lender, but for the borrower as well.

A receivership sale that has been confirmed and approved by the court is going to have an asset sell “as-is, where-is, no representations, no warranties—what you see is what you get,” Donell says. “The buyer’s only recourse is to look back to the receivership estate, which only has the asset of the property. There’s really nothing to go after.”

Also, a receivership sale saves time compared to foreclosing, he adds. That’s because “if you have an agreed-upon order from the court, you can start immediately. You don’t have to wait the four months to complete the foreclosure sale, and then get organized, line up brokers and so forth.”

A little less important, but worth considering, is that this means not putting a foreclosure sale on the credit history of a borrower, says Donell. Further, it eliminates the stigma of an REO property sale, “where you have all the bond fishers thinking that the bank is just going to give the property away. That happens in some cases, but you quickly eliminate those buyers because you expose the property to the market, most probably through a local or national broker. And as a receiver, it’s your duty to protect both the plaintiff and defendant and obtain the highest possible price you can.” Moreover, the receiver has the ability, subject to court approval, to close the sale free and clear of liens that would follow the proceeds of the sale, e.g., a disputed mechanic’s lien, where the vendor believes his lien has priority over the lender’s first deed of trust.

There are pitfalls to avoid, Donell points out, such as second trustees, secured lien holders and other parties to a loan that do not want to be eliminated at the sale. If the receiver can’t get everyone to the table, “the chances are the sale isn’t going to be successful. There’s a lot of controversy among the legal eagles who practice receivership law as to whether a rents and profits receiver can legally sell property. It’s like the Republicans and Democrats: they can’t agree on anything.”

However, Donell says, it's generally agreed that a receiver can work with all parties to a loan. “A receiver is an agent of the court,” he says. He doesn’t represent the plaintiff or the defendant; he’s working for the best interests of all parties. There are certainly no legal or ethical issues that hamstring the receiver in talking to all of them and trying to bring them together.”

He notes that in some cases, a lender who holds first trustee position will permit some of the money to be paid to these subordinate lien holders in order to complete a sale if they feel a property is deteriorating. “For example, I completed a sale of an unbuilt 48-unit housing tract near El Centro, CA about a year ago,” he says. “There were a lot of lien holders that hadn’t been paid on that project, and we were able to come to an agreement whereby the lender allowed some of these lien holders to be paid, to get their cooperation and to get their warranties—very important on a home if you’re completing it and want to sell it to a buyer.”

This solution made sense, he adds, “because the homes were sitting there and were going to deteriorate if we didn’t get them sold. Not only that, the market was also deteriorating, so the prices were going down at that time. The lender agreed that it was in the best interest to get the job done as quickly as possible. We were able to work out stipulations and allow these homes to close.”

It’s always important to get the title company on board in a receivership sale. “One thing I always do, and always recommend, is that when you prepare the proposed order for the court to approve the sale of the property, run that order by the title company, so that order is acceptable and has all the language that they need to issue a policy of title insurance to the buyer,” says Donell. “Without that, you don’t close any sales.”

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