Buying Real Estate - Chapter 11 Auction (sale, insurance, agreement, properties)

[TWG1572]

I'm looking for some general tips on the due diligence I should consider before buying property at a Chapter 11 bankruptcy auction. The property is bare land.


Here's what I know -


- The auction is listed as court ordered, property will be sold subject to court approval


- The auction bill states that the Seller will convey property by Court Officer deed, or be approved by the court to convey marketable title.


- The bankruptcy was originally filed in May 2017.


- There has already been a sale of the businesses' other assets, including inventory and equipment.


My initial assumption was that since this was a court ordered sale, the titles would be cleaned and issued as a clear title. But we all know what happens when you make assumptions. What questions should I ask, or what documents should I review to see to assure myself that this is true?


I was going to call the auction company for info, but thought I should arm myself with a little knowledge before having that conversation.

[jackmichigan]

What are the terms of the auction? Is it indicated whether they will provide a title insurance policy? If not, check with a title company to see if they could research the title and whether they would issue a policy if you win the auction. Since you're not under a purchase agreement, the title company may require payment up front to cover their research of the title.

[TWG1572]

Thanks for the response. Terms are 10% down the day of the auction, non-refundable. Balance due at closing, which is supposed occur before May 14.


I did end up speaking to the auction company. The individual there indicated that the title would be passed clear of any liens and encumbrances, and that both sides had lawyers assigned to making sure that would occur. That sounds great, but the phrase "trust but verify" comes to mind here.


Good question on the title insurance. No indication on that in the prospectus, just the sharing of closing costs. I may give the title company in town a jingle.

[jackmichigan]

So, it sounds like a cash sale or else you'd need to have financing firmly committed already. Don't chance that you'll be able to get financing if the down payment is non-refundable.

[TWG1572]

Financing is in the works as we speak. I won't be raising my hand at the auction without a firm commitment.


This is farmland, and I'm working with a large Ag lender that has a local office. The loan officer is aware that the loan is for the purpose of buying one of the parcels in this sale. So I there should be no surprises if I happen to win the auction. They are not the bank that has the security interest in the property.

[jackmichigan]

Yep, a Farm Credit agency is your best bet for financing (assuming that's the type of Ag lender you're working with). Good luck with the auction!


(Has there ever been a building or oil storage tanks on the property? That's one of the primary things to be concerned about with vacant land.)

[TWG1572]

Yup. It is Farm Credit. And thanks. I'll need all the luck I can get!

I've been looking over the old aerial maps. 4 of the 5 parcels I may bid on have never had buildings on them since the photography started back in the '40s. Odds are good there would be no underground storage tanks there either. The fifth parcel did have some barns that were bulldozed. Might be one reason to prioritize the other 4 parcels higher in the bidding process, all other things held equal.

This is a 363 sale, so I feel a bit better about the ability to get clear title. It seems like the "as-is' status is the greatest risk, as you pointed out with the storage tanks. The seller hasn't released any information other than maps, so it's pretty much all up to individual research.

[jackmichigan]

It's good that you have access to historic aerial photos. That's probably the best way to review a property's more recent history. As long as the photos document a good chronology, another thing to look out for is soil disturbance which might have indicated an old farm dump. I bought a large parcel a few years back that had a significant dump on it. It was a known to be on the property, however, since debris was visible on the surface, but the extent turned out to be somewhat surprising (it was in a wooded part of the property, so the aerial photos weren't the best of help). It cost money to remediate, but paperwork was filed with the state so that we weren't liable for further problems, if ever found.

Chances seem slim that there would have been underground storage tanks if only barns were on the one parcel. Most barn-related tanks were above ground so they could fill their tractors easily without having to use pumps. You might check with the fire department to see if they have any knowledge about the properties. Sometimes they kept records pertaining to flammables or hazardous substances for certain properties. Anyhow, it sounds like nice land.

[jackmichigan]

I think you may be in Wisconsin, so you might want to see if there are or were contaminated sites near the parcels you're looking at. Here's a link to get you to some of the online mapping tools:

https://dnr.wi.gov/topic/Brownfields/wrrd.html

[TWG1572]

Thanks for the link. Interesting stuff, I'm definitely bookmarking that site for future reference.


I went to the auction. The bidding was stronger than I was comfortable with, so no luck this time. But it was interesting to watch, none the less.