Bankruptcy Release Fee? Short Sale? Confused on Addendum

20 Replies

A property that I'm thinking of putting an offer has an Addendum that lists:
"Buyer acknowledges that this property is subject to Short Sale Lender and Bankruptcy Court Approval."
"Buyer will pay a $5,000 Bankruptcy release fee for properties less than $200,000. For properties $200,000 and above release fee will be 3% of the closing purchase price."
"Buyer acknowledges that the attached residential Purchase Agreement will be considered their highest and best offer.

"Property must be purchased in an individual name or LLC. Offers in the name of a corporation , trust or partnership are not acceptable."
"Buyer acknowledges that the property is sold 'AS IS' absolutely no repairs will be authorized."

So, this addendum also lists "in accordance with Nevada law" where things like that would be mentioned. And at the bottom has Greater Las Vegas Association of Realtors copyright 2012. The property is not in Nevada.

Anyone shine light on what this addendum means? The $5k is in cash after closing or added to the mortgage? My realtor just sent me the form to check out and said the listing agent said it will turn away a lot of buyers because it is a different situation.

Does this mean it is a short sale? If so, where does the bankruptcy part come into play? I'm just confused a bit and want to know what I would be getting myself into if we make an offer and win the bid.

Also, does this generally mean I can get it at much cheaper than it was a regular sale? Thoughts on that?

This seems a bit off and a bit wacky. A buyer would generally have no affinity to a Seller's bankruptcy plan. Buyer makes offer subject to Trustee approval related to how they are administering the BK plan. Essentially what I am saying is, I have never heard of and can not begin to understand what a "Bankruptcy Release Fee" actually is or means.

That seems like somebody is trying to establish floor on the fee paid for the sale. Is somebody trying to wholesale this to you? Can you be sure you are dealing with the actual owner on the other side?

Did you ask who you actually pay the fee to and when it is due?

The limiting of who can purchase does not make much sense either. A LLC can purchase but a corporation can not? Neither can a partnership? None of that makes a lot of sense either.

In regards to using some other state's approved real property contracts. Just do not do that. Request the standard/proper state forms for where the subject property is located.

I have never heard of these things and they sort of make me believe somebody is trying to do something behind the curtain. Perhaps I am incorrect. Curious if any other folks have seen these types of requests too.

Agree with @Dion DePaoli , something smells here. Properties in BK go through short sales and foreclosure all the time. In either case the property has to be released from the BK proceedings and I have Never seen any kind of release fee. From what you say I assume this is actually listed with a realtor. Perhaps the owner lives in Nevada, but the contract should be the state contract where the property is located. If this turns out to be true, any "fee" you pay will Not be included in your purchase price for financing purposes. It would be above and beyond any down payment and closing costs, additional out of your pocket.

Sounds like an idiot Realtor playing attorney. Let's see, a non-profit housing corporation can't buy it, I hear heads rolling. Release fee? Sounds like a lender is trying to capitalize on pulling any creditor's claim in bankruptcy, we will drop our claim and ask that the court approve the sale. Actually, they have little to say about it, but they could be losing out on a deficiency judgment on a short sale. Would be anyway from my experience. Pure speculation, never heard of such stuff. I have no idea what NV law is but it sounds like bank CYA stuff. I'd say take it out or next! :)

You guys think this is fishy? My realtor asked about the Nevda addendum. Just that addendum has the NV law stuff on it, and she was told it's because the seller moved to NV so I guess that's where their bankruptcy is?

The actual offer was on the regular contract that my realtor always uses that is the correct state where the property is located. We made an offer last night at $45k accounting for the $5 at closing, so that would bring us to $5k at closing plus the 20% down. I did all my calculations using that as well. It cannot be added to the mortgage, which I knew ahead of time.

Also turns out there's another offer as well. This is the third offer we've done this year (one in Jan and one last week). All have had other offers that seller's went with instead of ours.

Oh, I should also add; the addendum is signed by the bankruptcy trustee.

Don't bet on it that there is another offer.

The law applicable to the deal is to that applicable to the state where the property is located, absolutely not where the seller resides, a NV agent doesn't even need to be involved at all.

Turn it in to the NV RE Commission and see what they say. :)

Edited since you beat with the BK post:

I suggest you ask your attorney, the assets owned will be effected by the BK.

Originally posted by @Therese V. :
Oh, I should also add; the addendum is signed by the bankruptcy trustee.

I believe the NV BK trustee generated the addendum, and put it on the an NV realtor form because that's what he had available, which is not out of the ordinary.

I think he wants $5K because he's not planning to abandon the asset without a fight. I'm not sure why he's calling it a BK release. He may have invented that phrase. Regardless, if the property was included in the BK, the trustee is another player in the short sale, just like a junior lender. If he doesn't to agree to the short sale, then there is probably no deal.

@Dion DePaoli @Bill Gulley Does it real seem that nefarious to you? Isn't it just a BK doing their thing?

k marie poe, that's what I figured. /their realtor is in the same state as property. I never care if there are other offers, that doesn't change mine because I'm strictly by the numbers and not emotions.

You think the release is for the seller or the trustee? Does it matter?

Actually I thought about this during the day when looking at something else. The BK trustee gets paid a % of the fees collected, a high % on the first $25k or so. It has become popular here for investors to "buy" these properties in BK, through the trustee auction, for $5-10k, even when severely underwater, depending on if the property is in foreclosure, and how far along it is in the process, much like the HOA "buy to rent it out until the bank forecloses" strategy. Seems like that may be the case there, so the Trustee is used to collecting the fee., and doesn't want to give it up so you can do a short sale.

Originally posted by @Wayne Brooks :
Actually I thought about this during the day when looking at something else. The BK trustee gets paid a % of the fees collected, a high % on the first $25k or so. It has become popular here for investors to "buy" these properties in BK, through the trustee auction, for $5-10k, even when severely underwater, depending on if the property is in foreclosure, and how far along it is in the process, much like the HOA "buy to rent it out until the bank forecloses" strategy. Seems like that may be the case there, so the Trustee is used to collecting the fee., and doesn't want to give it up so you can do a short sale.

I'm assuming that the BK trustee is just like junior lenders in short sale. They can refuse to play play ball and let the property go to foreclosure even though they'll get wiped out and gain nothing. Or they can try to get someone who wants it to pay them. They know the lender won't agree to their fee as most lenders are pretty strict about paying only the agent and few other costs. They know the seller has no money. So why not ask the buyer.

Why not counter with $1K?

Originally posted by @Therese V. :
k marie poe, that's what I figured. /their realtor is in the same state as property. I never care if there are other offers, that doesn't change mine because I'm strictly by the numbers and not emotions.

You think the release is for the seller or the trustee? Does it matter?

It's required by the trustee. If the property is included in the BK, then there is no sale without the BK trustee's cooperation. The seller likely went to the BK with your offer to see if they could get his approval. He says he wants $5K. A short sale won't happen unless the BK trustee approves. If there's no short sale, the lender(s) will eventually foreclose.

Just my opinions and experience with BK. Maybe somebody can chime in and comment if there are circumstance where the trustee can be ignored in this case?

Does the property have any equity? Is it a short sale because of agent fees and closing costs, or is it really upside down?

dup

I will try to keep this short but no promises.

First there are 2 kinds of debts in Bankruptcy, secured, and unsecured. UNSecured debts can be wiped out in most of the Bankruptcy chapters unless there is a lot of extra money to throw around. A re-organization bankruptcy is the exception. In that they keep a large percentage of the property and pay a percentage to unsecured creditors and call the debt paid. Secured debts are treated differently in both dissolution bankruptcy and reorganization bankruptcy. It is possible for the trustee to put a stop to accruing interest on mortgages, but he usually cannot touch the principal. There is a rare exception called a cramdown. Where you can prove the property is worth much less than the amount of the mortgage and the Trustee crams down the mortgage to match the current value. I believe it is only done in reorganization bankruptcies.

OK normally a trustee has almost godlike power in Bankruptcies to sell property and liquidate assets and discharge unsecured debt. A Trustee cannot wipe out a secured debt.

My guess is that there is a property that is not exempt and the trustee is trying to get some money out of it but the mortgage may be worth more than the property. So the trustee cannot wipe out the mortgage to get his fee, but wants some compensation for processing the sale. Normally the Trustee says to Bank, ok here is the property back and the debt of the Debtor is hereby wiped out. The trustee may be hoping they get an offer high enough to pay off the mortgage and give him a percent of the excess, so he won't release it, however he cannot hold a secured property indefinitely or the creditor bank may appeal or object so he allows it to be sold by bid. If the property sells for below the mortgage amount the bank may be willing to do a shortsale and be done, but that would mean no money for the trustee because he gets a split of money he collects to pay unsecured creditors. So the $5K fee is his to collect for his time in doing the auction and releasing it.

I have never seen this type of thing before, but this is the only logical explanation I could come up with. You can look at the Bankruptcy papers to read up and figure it out. You can subscribe to a service called PACER, that will have every document filed in the Bankruptcy on it in electronic form. It is not a free service.

I did not do a lot of Bankruptcy but did litigate a few cases so am familiar with a portion of it. This is a very abbreviated summary, but hope it helps.

@Jerry W. I contacted a BK trustee last month to introduce myself and talk about purchasing properties that were over encumbered. I was assuming those assets don't typically generate income for the creditors or a fee for him so I thought he might interested. He said it wouldn't be worth his while unless I agreed to pay a minimum of $5K. Since his fee is a percentage, he was very clear he would not consider doing it for less. He also said I had to do all the paperwork and the only thing he would do is sign. He was an ***, but that's another story.

This was informative and interesting to me. If I were a creditor in a Ch 7 BK with no distribution, I don't like the idea of the trustee turning down $3K for an upside down asset because he doesn't feel like it's worth his time to sign the deed.

So the OP's addendum from the NV BK trustee seems in line with that thinking.

@Account Closed , it looks like my guess was right. The creditors should complain to the Federal Bankruptcy judge if he will not release a property that the secured creditor has a right to.

Yea, I have not experienced this type of pseudo hostage negotiation for a trustee fee. I have had some similar events with Receivers not BK Trustee. The core issue there for me is the fee is not net of sale but on top of sale. Clearly that creates an additional liability which can kill a fair amount of deals for many primary residence buyers. I don't have an issue with the guy collecting a fee, I have issue with the guy "adding" a fee.

The whole out of state disclosure form doesn't help the cause believing this guy knows what he is doing. Let's not forget the limiting of counter-party capable of buying the property. That said, in the universe I live, stupid things can happen everywhere. If this were my loan and I learned of these things, which clearly create barriers to settling a transaction, I would look into a complaint. Unfortunately, if this runs the same river as Recievers in general, that is an uphill battle as well.

Originally posted by @Dion DePaoli :
Yea, I have not experienced this type of pseudo hostage negotiation for a trustee fee. I have had some similar events with Receivers not BK Trustee. The core issue there for me is the fee is not net of sale but on top of sale. Clearly that creates an additional liability which can kill a fair amount of deals for many primary residence buyers. I don't have an issue with the guy collecting a fee, I have issue with the guy "adding" a fee.

The whole out of state disclosure form doesn't help the cause believing this guy knows what he is doing. Let's not forget the limiting of counter-party capable of buying the property. That said, in the universe I live, stupid things can happen everywhere. If this were my loan and I learned of these things, which clearly create barriers to settling a transaction, I would look into a complaint. Unfortunately, if this runs the same river as Recievers in general, that is an uphill battle as well.

My opinion of BK trustees in my area is pretty low. There's a little bit of the wild west mentality out here in the BK trustees in oil country. I imagine they have similar mindsets in NV. They know/think they wield power and don't always care about the details when no one is watching. Using a Nevada addendum, citing NV law for an out of state deal, charging a "release" fee.....whatever they can get away with doesn't seem out of the ordinary.

Good point about the fee being on top of sale. Indeed most retail buyers can't deal with that. So that makes it more difficult for the trustee to accomplish what it is he is supposedly trying to do. I'd chalk it up to stupid things happen. Perhaps more so in Nevada.

Sorry, I forgot to address the the part of only individuals or LLCs can buy. I have never heard of this and have no idea why that would be on there. As to choice of law, federal law controls how bankruptcies work, but individual states decide what exemptions apply to property of the debtor.

Found out they went with another higher offer, the agent said he'd let us know if it falls through. On to the next one!

Thanks for all the responses :)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here