Zombies in commercial real estate, also called zombie mortgage properties, are a type of investment property that has been deserted by its owner after a foreclosure process begins.
The financier, which is often a bank, is yet to take possession of the property. In this case, the foreclosure process is yet to be concluded and the zombie title persists in the name of the initial owner.
In this article, we’ll go deeper into what exactly a zombie title is, how it happens, how to get rid of a zombie property and give you an example of a commercial zombie.
What Is a Zombie Title?
In residential and commercial real estate, a zombie title refers to a property that has been deserted by its owner after receiving a foreclosure notice. Also called a zombie mortgage, zombie foreclosure and zombie property, these properties often fall into disrepair.
In many cases, the property owner receives a foreclosure notice from the mortgage lender. Thinking that the property is about to become an REO property, also known as a bank-owned property, the owner vacates and abandons the property. But if the lender decides that the foreclosure process isn’t worth the expense, they are under no obligation to complete the foreclosure.
The owner may not even realize they still own the title and is still on the hook for payments. The fact that the property is still in limbo, lingering in a space where neither the owner nor lender are taking responsibility for payments and maintenance, is why the phrase “zombie title” was created.
Why Do Zombie Mortgages Happen?
Commercial zombie properties often happen in low-income communities. Buildings that weren’t well maintained in the first place are susceptible to becoming zombies.
Often, the owner was unable to lease-up the building and couldn’t cover their expenses. In other situations, the cost of maintenance and repairs may have led to the property owner being unable to repay their debts.
At the end of the day, all zombie mortgages are the result of an owner who is unable or unwilling to continue making payments, and a lender who is unwilling to take back the property, often due to it being in disrepair.
How to Save Your Commercial Zombie Property
If you just found out that you still own a property that you thought was taken back by the lender, you might be wondering how to get rid of a zombie property. There are a few ways to get this zombie off your back.
- Stay in the property – If you’ve recently received a foreclosure notice, don’t be so quick to vacate. You only need to vacate the property if you receive a notice to vacate from the lender. That is an indication that they are going through with the foreclosure process. Abandoning the property will only create more expenses if you realize later that you still own a zombie title.
- Work with your lender – In the case of an impending zombie mortgage, you may be able to restructure your loan with your lender. Lenders may be willing to work with you to avoid the trouble of a foreclosure process.
- Get your name off the title – Don’t assume that the lender completed the foreclosure process. Once you are sure they have, be diligent about getting your name off the title. If your name is on a zombie title, it will be much more difficult to purchase property in the future.
- Consider a short sale – Talk with your lender about performing a short sale. With a commercial short sale, you can get your name off the title and get rid of the zombie by selling it at a reduced price. Often, lenders will agree to short sales because it allows them to recoup some of their money without having to deal with the repairs, maintenance and taxes that the zombie property requires.
- Always try to locate your lender – In some cases, lenders or loan servicers seem to vanish. That does not mean you are off the hook for payments. If you have a second mortgage, even if you declared bankruptcy, that lender still has a on your property. Always locate your lender so you can make payments. Otherwise, you could receive a surprise bill that could put your business out on the street.
Example of Zombie Mortgage Investing in Commercial Real Estate
Zombie properties are not as scary as they seem. In fact, they can be a great investment opportunity for value investors. Here’s an example of how that can work.
Let’s say an old office building in a low-income area appears to have been abandoned. Vines are growing out of control, the lawn hasn’t been mowed in a year, and there’s graffiti on the side.
You hire a commercial real estate attorney and conduct title research. You find out that there’s a lien on the property and contact the lender. The lender says they haven’t received payments from the property owner in three years but they haven’t concluded the foreclosure process.
You manage to contact the title owner. You let them know that they are still responsible for the default mortgage, but you offer them a chunk of cash to hand over the title and walk away. With your attorney, you file a quiet title action against any lien holders. If they do not come forward after a month or express disinterest in maintaining the lien, you take possession of the title.
With the money you were able to save by purchasing a zombie property, you fix up the property and fill it with tenants.
3 Best Practices When Investing in Zombie Mortgages
Investing in zombie mortgages is not for the faint of heart. It can be a tricky process as property owners, loan servicers, and lenders may all have a vested interest in the property. But at the end of the day, zombies are a blight on neighborhoods and generally cheap, so if you can restore their luster, you should.
1. Hire a commercial real estate attorney
We can’t stress this enough. Because zombie mortgage properties are subject to legal action by the lender, you want a professional to handle liens and taxes. Don’t skimp here!
2. Perform due diligence before beginning the process
When it comes to zombie properties, due diligence starts at the research phase. It’s more than a traditional inspection and appraisal, you need to dig into the history of the title, owners, and lenders to ensure the property is actually attainable.>
After that, inspections are of the utmost importance. The zombie could have been sitting for years without so much as a fan blowing or a light dusting. Make sure all faculties of the property work, from plumbing to HVAC to electrical, or find out how much it will cost to repair or replace them.
3. Have cash saved
You will not be able to finance a zombie property in most cases. Unless you have a private hard money lender, you’ll have to pay cash for your zombie. Consider that the attorney, inspector, appraiser, and property itself will be a hefty upfront cost.
Don’t Be Scared of Zombies
The fact is, whether you are the owner of a zombie or you’re looking to invest in zombies, it really comes down to paperwork. Do the numbers work? Can you afford to wait for the quiet title action? Is the owner or lender willing to work with you? These simply yes or no questions will help you determine the next steps to take.