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Buying Real Estate with Bankruptcy Court Approval

This week I released the listings on four nearly-oceanfront ag-zoned lots near Kapana’ia Bay in North Kohala (MLS# 272835 for example). The question I’m getting asked the most is, “What is the process for buying one of these lots which are subject to bankruptcy court approval?”

Kapanaia subdivision lots for sale

The new listings are on the land to the left in this photo and mauka of the tree-lined road to Kapanaia Bay, which is visible at right. The lots are 6-9 acres and each is priced at $495,000.

Start with the Regular Property Purchase Process

Luckily, I’ve been through the process already with two of the lots in the subdivision, so I can explain it pretty clearly at this point.

Kapanaia ag-zoned lots for sale

Two of the lots have already been sold…and they’ve been mowed and staked and a cul-de-sac built.

The first step is no different from any other purchase of vacant land in Hawai’i. Have your real estate agent prepare a Purchase Contract on the standard Hawaii Association of Realtors forms. As with certain other sales (bank-owned properties and short sales, for instance) several of our standard contingencies don’t apply:

  • the Seller is a Trustee appointed by Bankruptcy Court, not the actual owner. Therefore Seller is exempt from the statute requiring sellers to provide a Sellers Real Property Disclosure Statement.
  • the property is being sold “As Is” and “Where Is” and would not remedy any encroachments found by a survey.
  • purchasers received a special (limited) warranty deed rather than a general warranty deed.

 
In addition, closing date should probably be set to follow a specified number of days after bankruptcy court approval rather than after Seller Acceptance as would be customary.

“Subject to Bankruptcy Court Approval” – The Process

Once you as a purchaser have your offer accepted by the Trustee, you can begin your due diligence. Meanwhile, the attorney for the Trustee will submit a motion to sell to the Court, and get a date on the hearing calendar. That date will be three-four weeks out.

Perfect for horses or farming

Horse grazes in the pedestrian easement below lots 3 and 4, from which you can join shoreline public access (MLS# 272834)

While in a normal escrow all details are confidential until closing, in a bankruptcy sale your purchase contract will be attached to the sale motion, which means anyone can discover the terms of your offer, including price. And if someone else wants to outbid you, there is a process for doing so.

There is a deadline to make a competing offer, usually three business days before the hearing date. Offers submitted to the Trustee can be “superior” in the sense of higher price and/or better conditions and must include a cashier’s check for a substantial deposit payable to Escrow. (When the first two lots were sold, the deposit was $20,000).

If the Trustee receives an offer that he judges to be superior, the original purchaser is notified immediately of the terms of the higher offer and would have the opportunity to improve their offer to better the new one. In that case, Trustee will likely hold an auction prior to or perhaps shortly after the set hearing time with arrangements workable for all involved — probably telephonic since the Court is in Texas. Once a winning bid is determined, a record would be made in court with the parties confirming the details of the sale.

In most instances, there is no need for a prospective Buyer to appear or testify for a Trustee’s Motion to Sell. In the unlikely event there were an objection filed with respect to the sale, or a competing offer at a higher price, however, it might be helpful for the Buyer to appear or testify, which can be done in person or by telephone.

In Summary

Ana's down hill from cabin

The same Trustee is handling the sale of the 485-acre legacy parcel with waterfalls (MLS# 263044)

Prospective buyers and their agents should not be discouraged from buying a property just because it is subject to Bankruptcy Court approval. The Judge has already approved the listings and is familiar with the property.

The main differences are:

1. Timing. Allow an extra 3-4 weeks for the accepted offer to be approved by Bankruptcy Court.

2. Contingencies. The Trustee cannot and will not provide warranties or information that a regular Seller might.

3. Confidentiality. As soon as the motion to sell is filed with the court, anyone can discover your offer price and terms.

4. Possibility of competing offers. If all four lots sold quickly, there is a chance a buyer who missed out might try to outbid your offer prior to confirmation.

Contact me directly if you still have questions or are interested in one of these parcels.

A hui hou,

Beth Thoma Robinson, R(B)
Direct: 808.443.4588
Email: beth@hawaiilife.com

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