Investors are using different types of techniques in an attempt to acquire commercial real estate in Miami and elsewhere at a discount. One technique that has recently gained popularity as a result of market conditions is through the purchase of a defaulted first mortgage loan, commonly known as “loan to own”.
Acquiring Commercial Real Estate Through “Loan To Own”
Generally, the “loan to own” process works as follows:
borrower defaults under its loan,
lender sells the loan to a third party buyer,
assuming the property is in a judicial state such as Florida, buyer files a foreclosure action or substitutes as the plaintiff in the pending foreclosure action and proceeds to obtain a foreclosure judgment through summary judgment or a negotiated settlement with borrower, and
buyer is the successful bidder at the foreclosure sale and thereafter acquires title to the property through a certificate of title issued by clerk of the court.
Drawbacks of “Loan To Own”
As with any opportunity, there are possible drawbacks and risks associated with the “loan to own” scenario. One is that lenders generally require a very short and extremely seller-friendly loan purchase agreement with minimal (if any) representations and warranties (that expire very quickly) regarding the debt and generally none relating to the property. Typically there is a very short due diligence period, often with little or no access to the loan or servicing files (other than the existing loan documents). Since the lender owns the loan and not the property, access to the property and contact with the borrower may be very limited or specifically prohibited prior to closing. Other risks include borrower bankruptcy, non-cooperative borrowers and protracted litigation resulting from defenses raised, or claims made, by borrower. Some lenders will require the buyer to assume all liabilities with respect to the administration of the loan prior to closing.
Potential Buyers Should Analyze Risks
Despite possible drawbacks and risks, the “loan to own” technique is being used in Miami and throughout the United States as lenders continue to sell and shed problem loans from their books. It can be a good technique if the price is right and the buyer has performed proper due diligence and analysis. Potential buyers should retain qualified legal counsel, experienced at purchasing and selling distressed mortgage debt, and other professionals to review and negotiate the loan purchase agreement and related documentation and perform due diligence with respect to the loan, the loan documents, the borrower, any guarantors or tenants, and the property (including land use and governmental zoning requirements) prior to making an offer to purchase a loan (or pool of loans). Only then can the buyer properly access and attempt to quantify potential risks associated with the purchase.