The ins and outs of distressed property sales

Bank foreclosure / distressed property

The increase in the number of distressed property sales owing to the lockdown and a rising unemployment rate is an unfortunate reality.

Some of these property sales require a bit of work but they do provide cash-strapped buyers with the opportunity to enter the property market while rescuing the sellers from their debt.

Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa explains that the misnomer is that it is not the house that is in distress but the homeowner. “Distressed property sales refer to homes that have been put into the market because the homeowner has fallen into some sort of financial peril and can no longer afford to keep up with his debt repayments.”

Sadly, in these trying financial times, we are likely to see an uptake in the amount of these kinds of sales until our economic outlook takes a turn for the better. Rather than avoid these sales, buyers could potentially pick up a bargain – especially since their buying power is likely to be equally affected by our current economy. And, in so doing, they can help save somebody from their own financial troubles at the same time,” he says.       

Goslett explains the three corresponding terms used to describe these properties:

Bank-mandated sales

These sales are the first stage in the downward spiral of distressed property sales, and they are usually the less risky of these sorts of transactions since the owner is on board with the sale. Hopelessly behind on payments, the mortgage-holder usually volunteers to have the bank put the house on the market to recover the rest of the debt owed to them rather than attempt to catch up on the repayments. In these cases, homeowners may still reject offers they deem too low but are usually willing to accept offers to avoid having their property go to public auction.  

Sales in execution / public auctions

If the sale is taking too long, the bank may decide to take things to the next stage. After obtaining the required approval from the High Court, the property can be sold at a public auction. Rather than holding out for the best price, these sales aim to recover the outstanding debt owed to the bank and any associated costs in the quickest way possible. For this reason, a recent addition to Rule 46 by the High Court was made which, in short, makes the process more difficult for banks to go the route of a sale in execution and encourages them rather to place the property on their distressed programmes.

Foreclosure / Bank Repossessed Property

Should the property fail to sell at public auction, the bank then takes possession of the home and mandates the sale to their chosen estate agent. This can be incredibly traumatic for the sellers, which is why it is always advisable to be open with the bank from the very beginning if the homeowner is unable to keep up with their monthly instalments. Usually, the bank is then able to assist the homeowner before it reaches this stage.  

When considering these properties, Goslett advises buyers to set a purchasing budget as well as an additional renovation budget. “It is not always easy to arrange to view these kinds of homes, but it is still worth chatting to a contractor to hear their thoughts on the property and to provide a loose estimate on what it would cost to get the property back up to scratch,” he recommends.

These kinds of transactions can be tricky if you do not have an experienced professional to guide you through the process” concludes Goslett.