What Happens When One Forecloses on an Investment Property?

Commercial and residential foreclosure proceedings follow the same procedures.

When anyone finances property, the title to the property is in the name of the owner. Unlike a car loan or other consumer lending where the lender retains title to the collateral, owners have title to the property and service an attached debt. Foreclosure means lenders must prove the debt is in default and the lender can assume the collateral. Financed investment property belongs to the investor, and the lender has the burden of proof if he wants to take the property.

Foreclosure

Foreclosure is more complicated than just repossessing collateral. Since the borrower has title to the property, the lender must prove the debt is in default and there is no possible means for the borrower to satisfy the terms. When a borrower defaults on a car loan, a repossession agent can just come take the vehicle because the lender has the title. The car belongs to the lender until the loan is paid. With real property, the borrower has title, and the lender must use legal action to take the title.

Serving

Once the lender has decided there is no other means to satisfy the debt, papers will be filed with the local court to pursue foreclosure. If the court decides the action is in order, the property owner will be served with a notice to show cause why the action should not proceed. With investment property this means the landlord will get notice. In many instances, tenants may not even know the property is involved with court action. Rent or lease payments are paid regularly, and the landlord tends to his maintenance responsibilities. There is no legal requirement to inform tenants of the situation.

Hearing

After a given time period (usually 30 days) a scheduled hearing will determine the legal merits of the lender's foreclosure efforts. If the court finds for the lender then title is transferred. If, however, the court find for the borrower, then the foreclosure proceedings will end. This does not necessary mean the lender's collection efforts end or the debt is no longer owed; it simply means the borrower retains the property title.

Eviction

If the court finds for the lender, then the lender takes title to the property and can choose to evict the current tenants. Legal agreements such as leases and build-to-suit arrangements on property are between persons, not property. If evicted and not in default in any way on the agreed terms, the tenant will then have to pursue legal remedy against the landlord, not the new owners.

Lease

If commercial property is occupied and has profit potential, the new owner (the original lender) may opt to renegotiate the lease with the current tenants and continue the property as a commercial enterprise. It's important to remember that commercial property exists to generate profit.

Tenants

Commercial property tenants may or may not be affected by foreclosure proceedings. They may have to vacate. If they are good tenants, however, the new owner may opt to continue the lease agreement. Liquidating occupied profitable commercial property can be easier than vacant property earning no income. Also, the new owner may consider negotiating with the current tenant terms for the tenant to purchase the property. When commercial property is foreclosed not all the alternatives are necessarily bad for a good paying tenant.

References

• Lawyers: Commercial Mortgage Foreclosure
• Foreclosure Help: How to Deal With the Commercial Foreclosure Process