Everything You Need To Know About Commercial Foreclosures

A commercial foreclosure occurs when the borrower hasn’t kept up on their loan payments or violated other terms of a commercial loan. When a lender forecloses, it is an act of taking back the property they had given to the borrower. Each state has their own plan of action and laws regarding commercial foreclosures. Here is everything you need to know about commercial foreclosures.

Two Types Of Commercial Foreclosures

Judicial foreclosure process

The judicial foreclosure process is a lawsuit that lenders must file against the borrower in court. The borrower has 20-30 days to file a response with the court regarding the issue.

A court trial may be held if the borrower decides to contest the foreclosure. If the lender wins this lawsuit, there will be a judgment of foreclosure and order of sale to be awarded to the lender. A foreclosure sale will then be scheduled to sell the property and satisfy any debt unpaid. Because this scenario involves the court, these types of foreclosures are more lengthy than nonjudicial foreclosures.

Nonjudicial foreclosure process

Nonjudicial foreclosure is a simple and fast way to take a property back from a borrower without involving the court. This must be allowed by state law and must include a power of sale clause in the loan document.

Non-judicial foreclosures are a legal alternative to court proceedings. With this process, lenders can quickly foreclose on a property without having to wait for borrowers to respond. Before being able to use this type of foreclosure method, lenders must send the borrower a notice of default, then post a notice of sale on the property. Once these steps have been taken, lenders can proceed with foreclosure and collect their money. This process is currently allowed in only twenty-nine states.

Court-Appointed Receivers

The foreclosure process for a commercial property can take several months to finish. A receiver will be appointed once the acceleration documents are filed. They will then take ownership responsibilities for the borrower. Both foreclosure processes, the lender can request the court to appoint a receiver. The responsibilities for this position include:

Maintaining and managing the property
Collecting rent from other tenants
Crediting income collected towards the borrowers mortgage debt.

What To Expect During A Sale

When it comes to everything you need to know about commercial foreclosures, the sale is the most important aspect. In a foreclosure sale, the property can be sold to the highest bidder. Those sales proceeds are used to pay off the mortgage debt that the borrower owes to the lender. If the incoming bids are too low, the lender can bid on the property.

The lender’s bid included everything owed on the mortgage, including the principal balance and unpaid interest and legal fees.

A court-appointed receiver may sell your property outside of foreclosure. This is called a “deed in lieu” or a “deed in lieu of foreclosure” sale. Everyone involved in the process must agree to the receiver selling the property outside of the sale.

How To Avoid A Commercial Foreclosure

Life happens. However, if a commercial borrowing looked to be in danger of being behind on payments, it is best to talk with the lender as soon as possible. Lenders don’t want to foreclose on their property and would rather not deal with trying to find a buyer for the foreclosed property – called an REO (real estate owned). There are two approaches that can be taken to avoid situations like foreclosure.

Put together a forbearance plan

In a forbearance plan, the borrower agrees to catch up on late payments and interest over a certain time period.

Ask to modify the existing mortgage

Modifying your home loan during a foreclosure process is an option that allows the borrower to negotiate with their lender to modify the terms and conditions of their mortgage loan agreement. The goal of this negotiation is to come up with an arrangement that reflects the current financial situation of the borrower, including an opportunity for them to pay off the outstanding debt over time.