Buying Guide: Buying a Mortgagee Sale
Experts give the details.
Last updated: 1 February 2023
Mortgagee sales are not for the faint-hearted but they can be an opportunity for buyers looking for a deal to snap up a home at a good price.
What you’ll learn:
- The risks of buying a mortgagee sale
- Questions to ask when buying at a mortgagee sale
- Due diligence on mortgagee sales
As more homeowners come off fixed term mortgages and struggle to service their mortgage at much higher rates, inevitably more mortgagee sales will come on the market this year.
Mortgagee sales can represent a bargain for buyers, but these aren’t straightforward sales, so do your research on what they entail. For starters, you’ll have no guarantees on the home’s condition when you take possession, and taking possession itself is by no means a slam dunk.
26 Sylvania Crescent, Lynfield, Auckland City, Auckland
What to expect in a mortgagee sale
There are some key differences to take on when looking at mortgagee sales versus standard house sales, namely:
- The seller isn’t the property owner but rather their lender is.
- The former owner may not be totally on board that the house is for sale.
- The outgoing owner may not allow viewings, inspections or visits for valuers so due diligence can be limited.
- Any time up until settlement the owner still has time to rescue their finances and to take the property back from the lender.
- The house won’t come with the normal chattels of a home for sale, such as ovens, fridges, curtains and a lot more.
- The vendor doesn't need to provide any warranties, building consents or code compliance certificates either.
- The owner may not give full disclosure of any issues with the property.
- The sale may come with outstanding rates, body corporation fees, or other delinquent payments.
- You may have to resort to strong arm tactics to get the occupier to leave the property at settlement.
As Real Estate Authority’s Chief Executive Belinda Moffatt says: ”We always advise prospective buyers to undertake due diligence on any property they’re considering making an offer on, and this is especially important with a mortgagee sale.”
The mortgagee sale process isn’t as transparent as it is with a willing home seller, she warns. “Owners can, sometimes, seek to withhold issues with a property from their real estate agent and potential buyers in any sale, and an owner in a mortgagee sale may be even less inclined to provide full disclosure,” she says.
It’s not always possible to access the home for the usual property inspection but Belinda encourages that buyers push for this.
What a property lawyer says
Your property lawyer will be key in navigating the tricky mortgagee sale purchase process from early on. Devine Law’s Fintan Devine says the only thing the bank can guarantee the purchaser is that they’ll get the title to the property when it settles.
The buyer is taking more risks with this type of property purchase. When you buy a mortgagee sale property, you usually buy unconditionally, he says.
If the home is occupied by tenants you can’t just move that person out, if they’ve got a tenancy, he points out.
“If the property’s occupied by the owner and won’t leave, you’ve got two options,” says Fintan. You can go to the court for a possession order and a court bailiff will help get possession of the property. Or, alternatively, while the occupants are out of the house, you can get someone to go in, change the locks and gain possession. You’ll probably need a security guard and a locksmith for this, he advises.
Another thing to be aware of is that you might sign the contract to buy the property, but at any time up to the settlement happening, the defaulting mortgagor can remedy the situation and take back ownership from the lender. They might have success getting more funding from a second tier lender or family may pitch in, he suggests.
36 Withers Road, Glen Eden, Waitakere City, Auckland
What leading mortgagee sale agent says
Barfoot & Thompson’s leading expert on mortgagee sales, Philip Davis stresses it’s the terms and conditions in a mortgagee sale which make it quite different from a normal home transaction.
“There’s no reason why first home buyers can’t buy a mortgagee sale, but they should be aware that properties are typically sold “as is,” he stresses.
He always explains that the mortgagee (the lender) has the legal right to sell the property but they don’t own it and they don’t have possession of it, he says.
He notes that a number of mortgagee sales are withdrawn because the owner has found a financial solution, which is the ideal result.
“It’s very important to stress that banks are trying to keep people in their homes, nobody wants to lose their house, and banks try very very hard for that not to be the case,” he says.
Auctions are often used in mortgagee sales. Harcourts Whangamatā agent, Amanda Stenning says the finance company wants to see the best possible price reached and they want it to be a fair and open process.
The easiest way for a mortgagee sale is that it’s sold on the day with no conditions, she explains. Because there’s no guarantee on the chattels, there’s a very comprehensive document, so make sure you do your due diligence, she advises.
Selling an attractive mortgagee sale in Whangamatā, the occupiers have let Amandat access the property a couple of times. “We’re working for the finance company but we have to respect the current owner, it’s been their home,” notes the Harcourts agent.
There’s a strong argument for former owners to be helpful, says Amanda. Hopefully, they realise it’s better to sell for as much as they can so they may even get money returned to them, she adds.
What a mortgage adviser says
A number of lenders are not happy to finance mortgagee sales, warns Loan Market Capital & Coast mortgage adviser, Clifford Lawson. You’ll have to shop around. Sometimes, second tier lenders and private funders are more likely to get involved, he notes.
A mortgagee sale isn’t necessarily being sold by the bank, it could be a private financier or a family member who’s called their loan in. They may have lent the money and be in dispute, he explains.
Why don’t the main banks like to lend on mortgagee sales? It’s largely because it’s not clear what they’re lending on, he explains. And they don’t want to take on another bank’s problems.
The property could be a complete shell by the time the former owner exits, adds the mortgage adviser. “They don’t know what’s inside the house. If they’re able to get a registered valuer into the property, that helps, but they don’t like them because they don’t know what’s behind the walls.”
The mortgage adviser has heard of unhappy owners, who’ve taken out kitchens and bathrooms, strip wiring, copper piping, and even internal walls before leaving the property.
“A mortgage sale is similar to buying a leaky townhouse. You don’t know what it’s like until you’ve peeled the walls off,” says the mortgage adviser.
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