Purchasing Distressed Loans 6:19 am
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Question: There is currently a great opportunity to acquire real estate as a result of the recent number of loans that are on the brink of foreclosure. Real estate developers might have the ability to purchase these loans at a discount and then foreclose on the real estate securing such loans. When purchasing such loans with the intention of foreclosing on the real estate, what protections should a purchaser request be included in the agreement of sale?
Answer: Although lenders may initially be unwilling to make any representations or promises when selling loans secured by real estate, with some negotiation and insistence, a lender might agree to represent:
1. That it is the sole legal and beneficial owner of the loan and has the authority to sell the loan;
2. That it has delivered to the purchaser true and correct copies of all of the loan documents and all amendments and material correspondence associated with the loan;
3. That it has informed the purchaser about any and all litigation related to the loan and has provided all documents and other filings related to the litigation;
4. That, to the best of its knowledge, the borrower of the loan does not have any offset, claim, defense or counterclaim against any payment due under the loan or against any other obligation of the borrower under the loan;
5. The amount due from the borrower under the loan and what payments have been made; and
6. That it is not holding any escrow funds or reserves with regard to the loan or, if they are holding such amounts, the amounts then being held.
In the agreement of sale to purchase the loan, purchasers should add provisions to ensure that the lender does not amend the loan documents or commence any litigation without the purchaser’s prior written consent. Also, the purchaser should, prior to completing the purchase of the loan, investigate whether there have been any bankruptcy filings made by the borrower or the lender, and investigate whether there are any environmental or title problems with the real estate.
It has been said that for every problem, there is an opportunity. The number of distressed loans is no exception to that rule. However, the foregoing representations and other protections are important to confirm that the purchaser is getting the deal that it expects.
By Scott C. Butler, Esquire
Kaplin Stewart
910 Harvest Drive
Blue Bell, PA 19422
610.941.2560
sbutler@kaplaw.com
www.kaplaw.com
