As a bank, you may seize property if a borrower defaults on their loan. Lenders can also foreclose if borrowers don’t pay their property taxes or meet their debt service coverage ratio. Commercial foreclosures mean one of two things for lenders: a quick sale or more inventory.
Make sure you dot your “i’s” and cross your “t’s” when taking on new real estate owned (REO) property. Check these items off your institution’s list.
What to Do With Newly Acquired REO Property
Lenders can take borrowers to court in judicial foreclosures. Most Missouri foreclosures are non-judicial, so the lender doesn’t need to file a lawsuit. Bank-owned commercial properties are those that are given back to the lender.
After filing foreclosure paperwork, the lender puts the property up for public auction. However, the bank can make a credit bid of its own. The bank becomes the owner if the property doesn’t sell or it is the highest bidder.
At that point, you—the lender—decides whether to sell the property through a real estate broker or lease it as an income-producing asset. Most lenders don’t want foreclosed property adding to their risk.
Regardless of the decision, bank trustees should ensure they maintain REO property and make necessary repairs. It’s easy to forget that properties have other services and individuals tied to them. The bank should inform tenants, city utilities and insurance providers of the property’s new status.
Banks must review the property’s details as they transition to owners. Use this article as a resource to cover your basis.
1. Secure the Property
Previous owners or borrowers shouldn’t have access to the property after foreclosure. Don’t tempt fate by leaving the existing locks. Once your institution has control, it needs to secure the property.
Depending on the space, you may need to:
- Change the locks
- Change door or garage codes
- Add a security system or change the contact information for the current service from the borrower’s information
Store keys or automatic door openers in a safe place, like a lockbox, within your institution’s REO department.
2. Take Care of Insurance
Next on the list is insurance.
Real estate owned properties need insurance coverage in case the worst happens. A sinkhole could swallow the property. A maintenance specialist could have an accident, or a real estate broker could get injured showing the property.
Banks can add REO properties to their blanket insurance policy. As they do, they should cancel any commercial property insurance policies paid by the borrower.
3. Switch the Name on Utilities
Utilities are easy to bypass when you aren’t living in or using a space daily. The previous owner will not pay utility bills after finalizing the foreclosure.
Even an unoccupied property needs working heat and running water. Keeping the lights on, so to speak, helps prevent future damage.
Banks and lending institutions should switch utilities over to them. Call the current utility provider to change who is on the property’s account right away.
Many important services rely on electricity. A sump pump with no electricity can cause flooding and significant damage. Alarm systems will not function after 24 hours with no electricity. In some cases, fire protection may also be off with no water.
4. Make Necessary Repairs
As a lender, you can sell a distressed property as is, meaning it could have several unresolved issues. Once the borrower knows they’re defaulting on their loan, they may not be motivated to continue upkeep.
Properties that don’t sell at auction go to the lender. When the bank possesses the property, it should have it inspected. Lenders should ensure the property is up to code and make emergency repairs. Then it’s ready to go on the market.
Banks may decide to upgrade property or repair non-essentials. Improvements may help REO property sell in the future. It’s crucial to weigh the cost and benefits of making improvements versus trying to sell the property as is.
5. Hire A Commercial Property Management Company
Scheduling repairs. Getting keys from the previous owner. Marketing the property. Taking over real estate and ensuring it’s maintained is a responsibility most banks outsource to commercial real estate management experts.
Banks may repossess commercial property across the country depending on the institution’s size and service area. Time and effort go into confirming real estate owned properties are secure.
Banks don’t need to manage properties on their own. Lenders rely on property managers to handle details on their behalf. Property managers talk with tenants, collect rent if needed, and schedule repairs. They save your institution time and hassle while protecting it from liability.
When choosing a property management company, review their services to ensure they will meet your needs. Companies often provide the following:
- Help remove previous tenant/owner
- Outsource maintenance services
- Collect rents
- Market the property
- List the property
- Offer legal support
Have REO properties that didn’t sell at auction? Ask the management company about their marketing plans. If all they do is put a “for sale” sign on the property and hope for a phone call, you may need to look for another company.
Partner With a Commercial Property Management Company
If your institution has a large inventory of foreclosed properties, you need an outside team to work with maintenance providers and tenants. Hire a top-notch commercial property management company like Maples Properties of Branson.
Our licensed brokerage team at Commercial One Brokers are also experienced property managers. As experts in the field, we guarantee your REO properties get the attention they need so you can sell or lease them quickly.
Contact Commercial One Brokers today to learn more. We partner with banks and lending institutions.