Receivership in real estate is a court-appointed process in which a receiver manages the assets on behalf of the creditor to solve disputes. The receiver is the trustee who receives the funds or assets of the borrower that it can liquidate to pay the amount to the lender.
In real estate, it is important to understand how receivership works. It is crucial to learn the receivership process and a receiver’s duties through a real estate professional. As a real estate expert, I will help you understand receivership in real estate.
This post explains what happens in receivership and how the receiver carries out the receivership process. I’ll use examples to explain this term so that it’s easier to learn.
What Is Receivership in Real Estate?
Receivership in real estate is a legal solution in which a lender or a court appoints a receiver to recover the remaining funds from a defaulted borrower. The process of receivership starts when the creditor or a court puts the property under the control of a trustee to meet the financial obligations on their behalf.
Having a receivership makes it easier for the lender to recover funds in case of a defaulted mortgage. The goal of receivership is to solve the legal dispute on the property that serves as collateral in the mortgage. The receiver or trustee performs as the property manager and acts in the best interest of the lender and the borrower.
A receivership is a better alternative to foreclosure proceedings in which the lender takes property ownership. Foreclosure is lengthy and costly, and most lenders want to avoid it. Thus, mortgage lenders give control of property management to an individual who acts as a neutral person, known as the receiver.
Duties of a Receiver
A receiver in real estate is an independent and neutral individual appointed by the court to take responsibility for the property that serves as collateral in the mortgage. The receiver must be a licensed insolvency practitioner. This individual acts as a property custodian and manages all the affairs to recover the funds. The following are the responsibilities of a receiver:
- Identifying themselves as the new custodian of the property
- Repaying the loan to the lender
- Collecting rent
- Protecting the value of the property
- Maintaining the property in good condition and making repairs if necessary
- Securing the property by taking control of the property
- Selling or liquidating the property to get funds
- Maximizing profits
- Reporting to the court
The receiver doesn’t go against the lender and the borrower and acts in their best interests. They take orders directly from the court and report back to the court. The following are the two main types of receivers in real estate:
An available receiver in receivership has been given control of all of the property’s affairs. If multiple assets serve as collateral in the mortgage, the general receiver will control and manage all of them. A general receiver must also report to the court according to the schedule. The court can include additional duties for the general receiver if needed.
A limited receiver in receivership has been given control of a few of the property’s affairs. For instance, if the borrower has multiple properties that serve as collateral for a mortgage. A limited receiver will be appointed to any of the assets or property, and not all of them. A limited receiver has the same responsibilities, and they have to act in the best interest of the lender and the borrower.
What Is the Difference Between Bankruptcy and Receivership?
The main difference between bankruptcy and receivership is the protection granted to a party. With receivership, the creditor gets protection and more benefits, on the other hand, the main aim of bankruptcy is to protect the debtor. It is common to get confused between bankruptcy and receivership. The following is an explanation of both terms:
Bankruptcy is a legal process that starts when borrowers file a petition because they cannot pay the remaining mortgage. Through this process, the borrower gets freedom from the debt. Bankruptcy aims to protect the borrower instead of the lender. However, the main aim is to finish the debt by paying it off.
The borrower’s assets and properties are measured and evaluated for liquidation during this process. The amount obtained from liquidating these assets is used to pay off the lender. Upon successful completion of bankruptcy, the borrower is freed from the obligations on the mortgage.
A receivership in real estate aims to protect the lender’s remaining balance on the mortgage. Through receivership, the lender asks for protection of the collateral until the dispute is resolved. A third party receives the property or assets and controls them until the dispute is solved.
Receivership has more advantages than bankruptcy. Lenders prefer it because it is a simpler and less costly process. A receiver implements different strategies to determine the best possible outcomes for selling the collateral and recovering the funds.
Advantages of Receivership in Real Estate
Instead of pursuing bankruptcy or foreclosure, it is better to go for receivership in real estate. Here’s why lenders prefer receivership:
Receivership is less expensive than foreclosure or bankruptcy. Although the receiver charges a fee for the services, it is still affordable. For receivership, only a few hearings are required, and very few filing requirements make this option less expensive than foreclosure and bankruptcy.
A receiver can develop and implement strategies to make the deal more profitable for the lender and the borrower. Improved asset management helps the receivers collect more money for the lenders.
With bankruptcy and foreclosure, there are many requirements for all the parties involved. On the other hand, receivership requires fewer documents and fewer hearings. Plus, there is no requirement to file a disclosure statement or any other statement. The process takes place quickly, and the court grants the receivership.
Neutral Independent Receiver
The court appoints a neutral third party and gives possession of the property that serves as collateral in the mortgage. The receiver works as an intermediary to restore the borrower’s property and restructure the mortgage so the mortgage can be paid off to the lender. The receiver works in the interest of both parties. If things don’t work out, the receiver sells the property at the best possible value to give maximum profits to the lender.
Foreclosure and bankruptcy get more publicity and might result in defamation. The homeowner under bankruptcy or foreclosure has to file all their liabilities, assets, and finances to the court. However, receivership minimizes the publicity, and things are handled better for the benefit of the lender and the borrower.
Receivership in Real Estate Example
A bank gives a mortgage of $250,000 to a homebuyer for purchasing a home. The bank and the homebuyer make a mortgage agreement for a term of 20 years. During this term, the homebuyer pays monthly mortgage payments to the bank. However, after 10 years, the homebuyer misses three mortgage payments.
The mortgage becomes delinquent, and the bank contacts the homebuyer to make up for the missed payments. The homebuyer informs the bank that he lost his job and won’t be able to make further payments. The bank appoints contacts in the court to get receivership.
The court appoints a receiver to sell off the home, the collateral in this mortgage. The receiver works on behalf of the lender and the borrower to sell the home at the best price. The lender uses the sale proceedings to cover the remaining mortgage balance.
Frequently Asked Questions
What Does Going into Receivership Mean?
Going into receivership means that the lender has appointed a receiver to collect and sell the property over which the lender has a financial claim. For example, if a person has a mortgage and his company is the collateral. If the person fails to repay the lender, the lender will appoint a receiver to collect the payments. In this case, the company is collateral and it goes into receivership.
When Does the Receivership End?
Receivership ends when the receiver has successfully recovered the funds for which the lender or court-appointed them. The receiver develops a strategy to sell the property to recover the amount. If the property’s value has decreased, the receiver will try to add realizable value to it before selling it.
How Is a Receiver Appointed?
Once a borrower defaults on the mortgage, the lender may request the court to appoint a receiver. The receiver is appointed after the court looks for genuine reasons presented by the lender. The court then issues a court order for the receiver’s appointment. The court order has the details of the property, the reason for granting receivership, the receiver’s reporting duties, and the receiver’s right to be the property custodian.
What to Know for the Real Estate Exam?
Receivership in real estate is a legal process through which a court appoints a receiver to oversee and look after the management and sale of a distressed property. A distressed property is about to go bankrupt or foreclose because of a borrower’s default. A receiver acts on behalf of the lender or the court who appointed them and took possession of the property in question.
I hope you are clear now about how receivership works in real estate. But that’s not it; go through more such real estate terms so that you can ace your exams. Learn the easiest and most accurate Real Estate Definitions here.