Buying Property Through the Bankruptcy Court
June 19th, 2008 categories: Buying Honolulu Real Estate, Honolulu Real Estate 101
I have been fortunate to represent a number of U.S. Bankruptcy Trustees in the sale of Honolulu real estate. I find that many people think that the bankruptcy sales process is the same as a foreclosure. In some ways it is similar and in other ways it is totally different. Rather than comparing and contrasting the two processes, I am going to walk you through an outline of the bankruptcy (Chapter 7) sales process.
1. An owner of a property files Chapter 7 Bankruptcy and becomes known as the debtor. This will “stay” creditors from taking action to exercise their rights.
2. A Bankruptcy Trustee is appointed. The Trustee tries to find ways to make money available to pay off the debtor’s creditors.
3. The debtor’s home is valued and, if there is equity in the home it is listed for sale. A court order is required to approve the listing and it usually takes a few weeks to get the court order approved.
4. The property is marketed in much the same way as a home not under the jurisdiction of the Bankruptcy Court (placed in mls, advertised, shown, etc.).
5. A buyer writes a written offer through their real estate broker and the Bankruptcy Trustee will counter the terms of the offer that are unacceptable. Normally, under the listing agreement, your agent will be paid. Also, the Bankruptcy Court does not allow for Dual Agency.
6. Once an offer or counter offer is accepted then the Purchase Contract becomes binding upon the Trustee, subject to the approval of the Bankruptcy Court. Provisions are made in an addendum or the counter offer that the sale could be subject to a 5% overbid. This means that if a qualified purchaser shows up at the court hearing, and is willing to bid 5% more than the currently accepted offer, and then the court could reopen the price and sale. More than likely, if this occurs the Judge will ask that all interest parties step outside the court and the Trustee will then hold a brief auction.
7. The initial bid will need to be 5% greater than the accepted offer, with any subsequent bids coming in increments of $1,000. The property will be sold to the party willing to pay the most for the home. Once the auction is completed, the Trustee goes back into the court and asks the judge to confirm the sale.
8. Once the sale is confirmed, a buyer should expect to close the sale no sooner than 11 business days after the court order approving the sales is signed.
9. In order to overbid at court a buyer needs to do the following.
a. Come to court with a cashiers check in the amount of 10% of the maximum amount the buyer is willing to bid. For example, if a buyer is will to bid $1,000,000 he will need to have a cashiers check for $100,000.
b. An over-bidder will need show that they can pay cash for the property or prove that they have a loan ready to close the purchase. This loan will not be contingent on anything (i.e. appraisal, condition of property, buyer qualifying, loan app., etc.)!
c. Note that if a buyer fails to perform there 10% deposit check is non-refundable.
This is an overview based on my experience in selling property through the Bankruptcy Court. I do not mean it to be comprehensive nor to take the place of any legal advice one may need. In fact, if you are considering purchasing a property in this manner, I highly recommend that you engage an attorney to represent your interests in the court.
Today’s picture was taken at the starting line of this past weekend’s Nanakuli OCHRA canoe race.
