MORTGAGEE SALES – AN EXPERIENCED AGENT EXPLAINS THE PROCESS AND THE PROS & CONS

1/2/2017
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When a potential investor or buyer hears the term “mortgagee sale” or “repossession” you can often see the dollar signs in their eyes. There is a common view that mortgagee sales come with a lower than market value price. This can be correct in some cases, however thorough due diligence should be conducted before purchasing this type of property. Below we will look into the usual process in WA for mortgagee sales, as well as the pros and cons of purchasing a mortgagee in possession property. 

How do mortgagee sales work?

If a borrower defaults on their mortgage payments the mortgagee (bank or lending institution) have the right to repossess that property and sell it to recoup the loss suffered as a result of the default. When you apply for a mortgage, the property you are purchasing is used as security against your borrowings; that’s why the bank have the property professionally valued prior to your finance being formally approved. The mortgagee must of course follow the right process and give the borrower the correct notices before taking possession of the property, so if you default on your mortgage you will have plenty of notice before they take possession of the property from you.

When an order to take possession of the property is served, a local sheriff will attend the house to ensure the occupant leaves, and notices will usually be left in the windows advising neighbours and the public that the property has been repossessed. It is important to remember that even if you’re only leasing a property from the landlord who has defaulted on their mortgage, once the mortgagee has taken possession you will still be evicted from the property even if you have adhered to all the conditions of your lease.

The next step is for a real estate agent to be employed by the mortgagee’s representative. The agent will send information to the mortgagee’s representative on the state of the property and recommended repairs. On the odd occasion the property will have been left in an average condition by the previous occupant, but usually mortgagee  properties are in a state of disrepair. 

The mortgagee is obligated to act in good faith which includes attempting to achieve the highest sale price possible for the property, so usually they will spend a little money on the property to make it presentable, then put it to auction. Mortgagee sales have been known to go to the market via private treaty, but the usual process is to put the property to auction as this is the easiest way for the mortgagee to prove that they have attempted to achieve the highest sale price. The mortgagee may consider an offer prior to auction, but they are more likely to use the offered price to determine what the reserve price at the auction will be. 

Auctions are rare in WA compared to other parts of Australia, often due to lack of understanding. If you endeavour to purchase a mortgagee property that is going to auction, ensure you understand the auction conditions. With mortgagee sales this often includes a 10% deposit payable on the day of the auction, for the property to be sold on an as-is basis (all appliances may not be working, there may be unapproved structures, structural defects or termites) and settlement is to occur within 30 days of the auction. If the property does not sell at auction it will be passed in and the mortgagee’s representative will consider offers via private treaty. Remember that usually when you bid at auction the person with the highest bid at the end of the auction has the first right to negotiate if the property is passed in, meaning they will be the first person the mortgagee will negotiate an offer with and if they can come to some kind of agreement, the other bidders/interested parties will not be considered. 

After repair work has been completed, but prior to the property being marketed for sale, the mortgagee engages a property valuer to give them an up-to-date valuation on the property. From here they will set the sale price, and usually have a percentage variation from the valuation figure, allowing the mortgagee to accept offers within the variance of this figure. The mortgagee and their representative are unable to disclose information about the mortgagor (the person or people who had their property repossessed), the valuation amount or the amount they are expecting the property to sell for. The mortgagee usually keep their details undisclosed as well, as the repossession of a property can taint their reputation as a lender. Also, by disclosing any information about the price range, it could be seen that the mortgagee is not making a reasonable attempt to achieve the highest sale price for the property and therefore not acting in good faith toward the borrower/mortgagor. 

So now we have discussed the process of a property being sold via mortgagee sale, let’s take a look at the Pros and Cons of purchasing a mortgagee property:

PROS

  • Excellent opportunities can be presented to buyers; usually mortgagee properties are sold for 10-15% under the market value in the area.
  • Due to the mortgagee’s legal duty to the mortgagor/borrower to act in good faith, they will usually undertake some repairs works to the property in order to make it presentable for sale. This is money that you don’t have to spend. 
  • The process of buying a mortgagee property is very clear cut – everything is written in black and white in the contract and all bases are covered by the mortgagee’s legal team. This means you’re not dealing with an emotional seller who could make life difficult throughout the settlement process. 

CONS

  • Some potential buyers feel a little uncomfortable buying a property that has been repossessed from another. The human story behind the repossession could include heartache for a family, young children being left without a home and financial stress. 
  • Any risks associated with the property are transferred to the buyer at the time of the sale and the property is usually sold on an as-is basis. This means any damage to the property, structural unsoundness or other encumbrances on the certificate of title become the responsibility of the buyer. Unapproved structures will also be sold on an as-is basis by the mortgagee. 
  • It is often hard to find out which properties are being sold by a mortgagee since they have strict policies on the disclosure of that information in marketing. As mentioned the sheriff is often obliged to put notices in the windows of the property to advice the public of a repossession, so if you suspect a property as being a mortgagee sale it is worth doing a drive-by or speaking with the real estate agent. 

The most important thing to understand when purchasing a mortgagee property is that although a bargain is often there to be had, the property is to be sold on an as-is basis and the mortgagee are unlikely to disclose information related to the property as they usually never see the property, and aren’t aware of any associated defects. One way to mitigate potential loss through buying a mortgagee property in Perth is to gain permission from the mortgagee to have a Building Inspector undertake a Building and Timber Pest Inspection prior to the property going to auction/submitting an offer. This way you can go into the negotiation process being much better informed than other buyers and being prepared with a maximum sale price. 

This article was written by Charlotte Flatt 
Cap-It-All Building Inspections Perth

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