Dealing With Distressed Developments
have recently written on the topics of short sales and REO
contracts. Today, I continue with the theme of buying and selling
real estate when the seller is in financial difficulty. The recent
economic downturn stalled a number of new projects in the middle of
their development activity. The resulting slowdown in sales caused
some developers to get behind on their payments to contractors, and, in
extreme cases, to declare bankruptcy. In some situations, new
developers have taken over stalled projects. Here are some steps
you can take to safeguard transactions involving distressed
First, if the developer has declared bankruptcy and is still under the
supervision of the bankruptcy court, you will need to involve an
attorney from the beginning. The complexities of the
bankruptcy court should only be navigated with legal assistance to
guarantee that the bankrupt party has the authority to undertake the
transaction contemplated and that all approvals from the bankruptcy
trustee, creditors, and the court are in place.
Second, you should investigate whether there are any contractors' liens
on the property with which you are dealing. If you are
representing a seller, interview him or her thoroughly to get the full
picture of the lien status on the property, and then verify
independently at the courthouse what the seller has told you. If
you are representing a buyer, research the lien records at the
courthouse to determine the situation. Your goal should be to have
a plan in place to satisfy any contractors' liens at closing. If
you are not comfortable doing this research yourself, an attorney's
office can assist.
Third, if a new party has taken over from the original developer,
research the title records to make sure ownership has transferred and
any reserved developer rights have also transferred. This is
critical if the new developer is working to complete the infrastructure
and amenities of the project.
Finally, I recommend investigating the status of the property owners'
association if one is in place. Is the developer still appointing
the board? Is the association functioning properly with a duly
elected or appointed board? Are dues from lot owners paid
up? Are collection efforts underway? Ask as many questions
as you can think of to find out if the association is functioning
properly so that your buyer has a smooth transition to ownership.
With this extra due diligence, you can still complete closings from
distressed developments successfully and efficiently.
not hesitate to contact me to receive more information on this topic or
to suggest topics for future editions of 'A Legal Moment'. You may not
rely on this content as legal advice for any specific situation, but
should instead contact an attorney for specific advice.