Unfortunately I am something of an expert on receivership sales. Back in 2013, my ex-partner petitioned our real estate portfolio into receivership without notice to our lenders. As a result, almost every property was sold via receivership or power of sale for a significant discount off the fair market value, all in a rising real estate market. During that process, I became painfully aware of the eight reasons that Receivership sales are always at a discount.
Placing a property under receivership requires a court order. Court proceedings are public. As a result, there is publicity surrounding receivership sales. When someone hears that a property went into receivership, the perception is usually that there must be something wrong with the property. Generally receivership sales are ordered when there is controversy and contention between warring factions, be they partners, a lender and borrower, or family members. This perceived stigma detrimentally impacts the property. Negative publicity will reduce a property’s value.
Reason # 2: The Process
In a private sale transaction, typically one buyer negotiates with one seller to purchase a property. Receivers don’t have that option; they must run a sales process. This usually means offering the property to market for a specified period of time with specific advertisements in specific publications, a real estate listing, and an offering to customers of the Receiver’s firm. Receivers generally want to review all offers at the same time. This tender process is a disincentive to a lot of potential purchasers. Potential purchasers prefer to deal one on one with the seller of the property. Most purchasers don’t want to be put in a competing arena with other purchasers. Hence the process that Receivers need to run turns away many potential purchasers.
Reason # 3: Uncertainty
Obtaining approval for a Receivership sale requires a Judge’s approval. The Judge has a number of competing interests to address and if one of the parties objects to the sale, that objection often delays or stops the sale from being approved. As a result, there is very little certainty in putting in an offer for a property being sold via receivership. Until the sale has closed, the sale may be cancelled at any time. This lack of ability to plan causes many purchasers to not bother offering in the first place. The end result is so dependent on forces beyond the purchaser’s control that it discourages some purchasers from buying.
Reason # 4: Higher Deposit Requirements
Receivers want certainty even though they cannot offer the purchasers certainty. As a result, they usually require at least 10% of the proposed purchase price to be tendered with the offer to purchase during the tender process. Generally the deposit cheque must be certified. Hence a purchaser, before knowing if his or her offer is even going to be accepted, has to go to the bank and obtain certified funds for 10% of the proposed purchase price just to offer. This is a major disincentive for many buyers and thus reduces the pool of potential buyers.
Reason # 5: Complex Purchase Agreements
The standard TREB or OREA form is fairly straight forward. Once you have dealt with it a few times, it is user friendly. Not so with receivership forms. Offers to purchase through receivership are typically at least four times as long as the OREA form. They are full of legal language explaining all of the ways the Receiver can exit the deal and everything that must occur before closing. A prospective purchaser usually requires legal advice just to understand the agreement before he or she can sign. The need to seek legal advice before offering is a disincentive and reduces the pool of potential purchasers.
Reason # 6: No Warranties or Representations
A Receiver cannot give warranties or representations. As a result, a purchaser of a property under receivership takes the property “as is, where is”. That means the purchaser must be comfortable with more risk than in a normal private real estate transaction. A Receiver cannot represent the rents being collected on a commercial property, for example, nor can he or she warrant the status of the building systems in any capacity. They guarantee nothing! That reduces prices because purchasers must shoulder more risk than in a private sale transaction where there are almost always representations and warranties.
Reason # 7: Lack of Specific Property Knowledge
The Receiver did not purchase the property. They generally have not run it very long if at all. They are not real estate experts. They generally don’t understand the strategic buyers of a property or its highest and best use. Their expertise is in accounting. As a result, the property is generally not marketed as effectively as it would have been if a private owner sold it. The person who bought it can usually market it better than a Receiver. This lack of expertise reduces property value.
Reason # 8: Firm Offers are Preferred
Receivers have to go to Court to recommend that a Judge accept a purchase agreement. This takes a lot of coordination, effort and paperwork. As a result, they ideally want to present firm offers. Otherwise the purchaser could exit the deal after all that time and money is spent to secure approval. Receivers generally won’t accept anything other than firm offers from purchasers. This puts purchasers in a position to have to waive all conditions even though they may not have a good sense of the property and its perils. Having to provide a firm offer instead of a conditional one always discounts prices.
Our real estate portfolio was sold at 70 cents on the dollar in a rising real estate market. Watching that process made me acutely aware that it is a legal fiction that fair market value is ever achieved through a Receivership sale. The eight reasons listed above guarantee that Receivership sales will always trade at a discount.