Is it worth buying an occupied apartment from a receiver?

An apartment is offered for sale for less than half its market value. On paper, this looks like a rare opportunity, but there is a detail that changes the whole picture: the buyer receives ownership, while the previous owners continue to reside in the property as protected tenants. He buys an apartment today, but does not know when he will be able to take possession of it.

Such situations may arise in enforcement proceedings opened due to debts to local authorities or other creditors, as opposed to mortgage realization. When it comes to the debtor's residential apartment, its sale requires consideration of a reasonable place of residence or alternative arrangements for the debtor and his family members. In practice, it is usually agreed that the debtor will remain in the apartment as a protected tenant. Such an agreement provides an immediate response to housing needs and allows the sale to be promoted relatively quickly, but the apartment is sold as occupied.

A protected tenant can only be evicted if certain conditions established by law are met, and therefore in practice he may remain in the property for many years. In appropriate cases, the value of ownership of an occupied apartment may be about 35%–50% of the value of ownership of an apartment when it is free of any person and object. This is not a free discount. The gap reflects primarily the uncertainty about when the apartment will be vacated, as well as the limitations on the use of the property until then.

A buyer examining such a transaction tries to estimate the waiting period. Among other things, he takes into account the age of the tenant, his personal and family situation, the identity of other possible rights holders, and the chance of reaching an agreement on eviction in the future. However, it is by no means advisable to base a transaction on the assumption that the apartment will be vacated at a certain time. This is a possible scenario that is not guaranteed.

The rent is decisive. The data that may change the economics of the transaction is the amount of the rent. Many assume that a protected tenant necessarily pays a very low amount. However, the low rent known to us from old protected apartments is largely the result of a historical process: rent that was realistic in the past has been eroded over decades and has moved away from market prices.

In one of the cases where I represented a buyer of an apartment from a receiver, the previous owners of the apartment continued to live in it as protected tenants. I argued that they should be charged a realistic rent, because there is no justification for applying to a protected tenancy created within the framework of the sale the historical erosion that characterized old protected lease agreements. The court accepted my position and ruled that the tenants would pay a realistic rent.

Such a ruling has two consequences for the buyer. First, it may provide more significant income during the period when the apartment remains occupied. Second, when the cost of living approaches the rent accepted in the market, the economic incentive to remain in the property decreases, and the tenant may be more willing to reach an agreement on his eviction. There is no guarantee of quick eviction in this, but it is a key consideration in assessing feasibility.

Before buying an apartment from a receiver, one needs to answer four questions:

1. What is the true value of the apartment when it is vacant, and what is the discount rate that reflects the risk?

2. What exactly is the status of the occupant and who may continue to occupy the apartment?

3. How is the rent determined, and is there a possibility to demand a realistic rent?

4. Is the buyer able to wait for years without needing the apartment for his own residence or for its sale?

The transaction may be suitable for an investor with a long horizon who buys at a large discount, can bear the uncertainty, and conservatively estimates the income during the holding period. On the other hand, if the feasibility depends on quick eviction, if the status of the tenant is unclear, or if the expected rent is low and does not compensate for the waiting, the low price may turn out to be expensive in retrospect. When buying an occupied apartment from a receiver, it is not enough to ask how much the apartment is worth. One must ask what the right to receive it in the future is worth, after a period of unknown length. Only when the price, rent, and risk align with each other can the discount turn into an opportunity.