BUY INSOLVENCY PROPERTY

WHAT IS INSOLVENCY REAL ESTATE ALL ABOUT?

The purchase of a property from insolvency involves a property belonging to an insolvent debtor. If a real estate company becomes insolvent, the insolvency administrator takes over the administration and sale of the assets in order to satisfy creditors. The administrator, usually a specialist lawyer, is responsible for the sales process and must achieve the best possible price. Creditors themselves can also influence the process. Insolvent properties are sold in two ways: via a so-called forced sale and, more frequently,by private treaty, i.e. to private buyers as normal. In this article, we take a look at the sale of insolvency properties by private treaty in Austria and the most important points to bear in mind.

HOW DOES IT WORK?

1. Valuation & expert opinion: The valuation is carried out by a court-appointed expert. A professional valuation is essential for a fair payment to creditors. They use various methods, such as the comparative value, income value or asset value of a property, all packed into a report that is usually 30 to 100 pages long. Important: The estimated price is also the lower limit or minimum price below which the property should/may not be sold. If a purchase offer were to be made below this estimated price, this would give rise to the suspicion that the assets were being squandered, which the insolvency administrator and court should of course not expose themselves to. In addition, this price creates transparency and trust among all parties involved.

2. Sale & offer: The sale begins with the appraisal, which is published (https://edikte.justiz.gv.at/) and can be viewed by anyone. However, insolvency administrators and surveyors are not available to answer questions about the property. I have personally experienced how some people have tried to view the property privately but have not received any further detailed information or answers to their questions. It is therefore advisable to go through an estate agent who specializes in insolvency properties, perhaps even has a legal background themselves, and who knows the process inside out and can provide you with massive support. Once you have decided on a property after careful examination, you can submit an offer to the insolvency administrator. Some require specific conditions for submitting an offer, such as the commitment period, while some insolvency administrators are more flexible. 

3. Award & settlement: Ideally, you are the only bidder and the seller wins the bid. If there are several bidders in the running, the insolvency administrator has the option of either setting a deadline by which all bidders can submit a further bid or inviting the bidders to a court hearing where a bidding process takes place. Once the bid has been accepted, the purchase agreement is deemed to have been concluded. The buyer must then submit a purchase contract, which is agreed with the seller, and then transfer the purchase price to an escrow account held by the administrator. The final step is to go to the insolvency court, which still has to approve the purchase agreement. If the purchase price achieved is at or above the estimated value, you will usually receive this court approval without any problems. A practical tip at this point: Because the insolvency administrator's commitment to the purchase offer is already fully valid and court approval only postpones its validity, so to speak, it can make tactical sense to submit a commitment period for your own purchase offer that is as short as possible. If the trustee in bankruptcy then agrees, you may have beaten out other bidders who do not manage to submit their own purchase offer by the end of the commitment period. So time is of the essence here. Important note: Even after the purchase agreement has been concluded with the insolvency administrator, it is still possible to submit a higher offer before the court approves it. This makes it all the more important to act quickly with the help of a specialized real estate expert (like us).

DISADVANTAGES & RISKS

• Overlooked defects: due to hasty purchase decision

• Lack of warranty: Exclusion of warranty, no liability, as no assets available

• Complexity of insolvency proceedings:

  • 1. communication with the insolvency administrator is more complex, as he is not specialized in sales and can hardly provide any information. They usually only refer to the valuation report of the court expert. Other documents are usually not available, so communication and documentation on the property are too poor for most interested parties and professional support should be sought.

  • 2. waiting period until the final approval of the purchase contract by the court;

  • 3. no trustee - prepayment obligation without a trustee is unusual, but you pay into a separate trust account of the trustee in bankruptcy

• Financing problems: no financing proviso, financing commitment must be in place

• VAT: In the case of property developer bankruptcies, it can happen that a property is then sold with VAT. This must be taken into account when submitting the purchase offer. 

ADVANTAGES & OPPORTUNITIES

• Properties at or below market value: Why? The appraisal represents a general market value, but often does not include all aspects relevant to the purchase, as many appraisals often do not take into account factors such as micro-location, furnishing details or energy efficiency. In addition, many appraisals are prepared as so-called desk appraisals, without an on-site inspection of the actual property. And there may well be attractive estimates in terms of price. Here, too, it is important to consult a real estate expert or estate agent who can at least provide a second estimate of the property so that you don't buy too expensively.

• Lower risks for the seller: A purchase from a bankruptcy estate typically involves considerably lower risks for the buyer than a purchase from a private or commercial owner, whose financial situation, reliability and dependability are often difficult to assess. In any case, a purchase from the liquidator eliminates the risk that the property will be sold several times or otherwise encumbered with a lien.

• Deletion of liens / mortgages: Transferring the purchase price to a bankruptcy account also ensures that the purchase price is used to satisfy the bankruptcy creditors at a later date, which ultimately also results in the deletion of the liens and mortgages.

• Sale for financial reasons: Conversely, this means that the probability of selling due to structural defects is lower in the case of insolvencies. Nevertheless, this does not exempt you from taking a very close look at a property, including its construction.

• Lower ancillary costs: 1. since the insolvency administrator himself is the trustee of the insolvency estate and therefore no extra trustee is required, there are no trustee costs. 2. if you buy without the help of a real estate expert or broker, their fees are eliminated.

COMPARISON INSOLVENCY VS. PRIVATE PURCHASE

SUMMARY & RECOMMENDATION

There are often opportunities when buying insolvent properties, but there are also risks. Appraisals set a minimum price, but hidden defects and complicated processes are possible. It is therefore advisable to seek advice and support from an expert when buying insolvent properties - from gathering information, viewing, appraising and assessing the advantages and disadvantages of a property to communicating with the insolvency administrator. 

So, despite the greater complexity, which a professional estate agent more or less offsets for a potential buyer, the purchase of such a property can be a worthwhile acquisition if approached correctly.

There are other aspects to the whole topic and some additional tips that I would be happy to discuss with you in a personal meeting. If you have any questions or need advice, my team and I will be happy to help you anywhere in Austria! 

Any questions ?

Dr.iur. Andreas Bonschak, LL.M.