Having a property repossessed is any homeowner’s worst nightmare, but for buyers, distressed estates can be a great way to find a well priced property. Banks typically sell insolvent properties for less than open market value In order to cover their costs as quickly as possible. This presents some great opportunities for savvy investors looking to snap up a good deal.
“When approaching the distressed property market, it’s important to understand the three basic types of sales that take place,” says Tony Clarke, Managing Director for the Rawson Property Group. “There are bank-mandated sales, Sales in Execution, and Properties in Possession, and they all have different processes that can affect their price and potential value.”
According to Clarke, bank-mandated property sales tend to be listed at fairly realistic market-related prices, and therefore offer less value to bargain-hunters when compared to other types of distressed sales.
“Bank-mandated property sales are usually a voluntary step made by the mortgage-holder in order to resolve a bond that has fallen irrevocably into arrears,” he explains. “The mortgage-holder gives the bank a mandate to sell the property on their behalf in order to settle their debt, and the bank is then responsible for hiring a real estate agent to market and facilitate the sale. Just like in a normal property sale, however, the owner – or mortgage-holder – retains the right to refuse an offer to purchase, and is under no obligation, other than their own financial pressure, to accept lower offers than they otherwise would.”
In the event that a bank-mandated property doesn’t sell, or the owner chooses not to accept any offers in spite of their ongoing debt, the bank will be forced to take things a step further and proceed with legal action. They are required to obtain judgement from the High Court against the defaulter, after which the property can be attached and sold by the sheriff at a Sale in Execution auction.
“Sales in Execution always take place in an auction environment,” says Clarke, “with a minimum reserve price which is often far less than the market value of the property. The reason for this is that the main purpose of the sale is not to achieve a good price, but rather to recover the outstanding debt owed to bank by the mortgage-holder and any associated legal costs as quickly as possible.”
Sales in Execution can offer outstanding value to buyers, especially since preferential financing is often made available by the bank driving the sale. “100% loans and significantly discounted bond fees are common,” says Clarke, “but you will need to pay a deposit – usually 10% – immediately on purchase, as well as Sheriff’s commission which is calculated as a percentage of the purchase price.”
Clarke also advises reading the fine print on the conditions of sale very carefully, as the purchaser can sometimes be held responsible for any outstanding rates, levies and taxes on the property, as well as the eviction of any tenants, or the previous owners, if necessary.
If a property doesn’t reach its minimum reserve price on auction, it is bought back by the bank and becomes a Property in Possession, otherwise known as a bank repossessed property.
“Just like Sales in Execution, bank repossessed properties are typically extremely well-priced in order to sell quickly,” says Clarke, “and they are subject to the same preferential financing options.” Unlike Sales in Execution, however, offers on repossessed properties are made directly to the bank via their appointed real estate agent, and are accepted or declined at the bank’s own discretion.
“Because this is generally the last resort for a bank to recoup their losses on a mortgage, low offers are less likely to be dismissed out of hand than at any other point in the process,” Clarke points out. “Add to this the fact that transfer duty does not apply to Properties in Possession and you have the makings of an exceptionally affordable – and potentially profitable – investment.”
Of course, bank repossessed properties have normally been on the market at least once before without selling, during the Sale in Execution phase, and buyers should be aware that there may be good reason for this. “It’s not always the case, but repossessed properties are often fixer-uppers,” admits Clarke. “If a mortgage-holder can’t afford his or her repayments, it’s unlikely that they are going to have had much money to spend on upkeep and property improvements.”
Other downsides include the fact that transferring a Property in Possession into an individual’s name can take up to six months, and, as with Sales in Execution, the purchaser can be held responsible for any arrears on rates and taxes and the eviction of any tenants.
“Buyers should also keep in mind the fact that viewing repossessed properties can be difficult to arrange,” Clarke points out, “and having a professional inspection done isn’t always possible.”
As with any investment, there are risks involved in buying distressed properties, but the rewards have the potential to be extraordinary. To find out more about opportunities in the distressed property market, visit the home loans section of any major bank’s website, or contact a Rawson Property Group franchise near you.