People tend to speak in shorthand when talking about foreclosures—saying, for instance, that businesses hand the keys over to the bank. But that’s not really what happens. And also when you recognize why that isn’t what takes place, you can start to recognize exactly how foreclosures can help banks conceal losses.
Basics of Foreclosure:
When you first took out a loan for your business, you probably secured the loan by giving the bank a mortgage or deed of trust in the business. This reference provides your lender with a legal claim to your business. Under the terms of this arrangement, the lender has the power to enforce its legal claim on your business through foreclosure proceedings if you fail to live up to your side of the contract. The bank must make your payments on the loan, in order to avoid foreclosure. If the lender does foreclose on your business, your business property will be sold, either at auction or through a private sale, and the proceeds of that sale will go towards the remaining amount on your mortgage.
Foreclosure Is An Auction.
When a borrower defaults on his business loan, a bank can force him to sell it at auction. The auctions are typically open to all comers. In theory, the auction process would establish a market price for the business that would allow banks to know exactly the recovery value on the loan. If an outdoors celebration purchased the business from the public auction, the financial institution would obtain the proceeds and also might make a note of any kind of losses– the distinction between the full value of the mortgage and the rate paid at the auction. Banks can utilize the services of an asset recovery company to fulfill this task.
How Bank Use Foreclosures
Typically a bank will certainly put in a proposal on a foreclosed business in order to limit the losses on the loans. In a market where business prices are going up or are expected to go up soon, this move makes sense. It allows banks to avoid a big loss on a temporary business downturn. Yet if you remain in an environment when organizations remain in free fall with no bottom in advance, this winds up developing a synthetically high rate– and also, therefore, conceals the real losses a financial institution might experience the business loan default.
The bank’s purchase of the business may have put a floor on the immediate losses from the mortgage default but it doesn’t stop business prices from dropping. If the market continues to deteriorate, the business now owned by the bank could be worth even less. The bank bought the business for $150K and booked it at $165K. But the market value of the business could be far less.
If you are a bank or leasing company that has repossessed a foreclosed company’s assets, you have options to recoup your investments. Asset Recovery Company is such a company that specializes in remarketing business assets in auctions that can extract as much return as possible to minimize your losses due to business foreclosure.