Properties sold by way of mortgagee sale often sell for less than similar properties on the open market. This can make a mortgagee sale attractive to purchasers, particularly those looking for a “bargain” or investment opportunity.
However, mortgagee sales also come with additional risks for purchasers. This article outlines some of the key issues and risks to be aware of, so you can make a more informed decision before buying by way of a mortgagee sale.
What is a mortgagee sale?
A mortgagee sale happens when a property owner defaults on their loan repayments and the lender, called the mortgagee, exercises their right to sell the property pursuant to the terms of the mortgage security registered against the property. The mortgagee does this to recover the money owed to them under the loan agreement secured by the mortgage.
Why are mortgagee sales often cheaper?
Properties that are sold through a mortgagee sale often sell for less than market value due to the fact that the mortgagee is focused on selling the property promptly. The mortgagee is required to obtain the best price reasonably available at the time of sale but is not driven to obtain the absolute best price possible in the same way a regular property owner might be. This means the property may not be repaired, cleaned, staged, or marketed in the same way as a standard sale. The mortgagee is also unlikely to wait for the “perfect” time to sell.
What are the risks of buying through a mortgagee sale?
There are several important risks to understand and consider before buying a property by way of a mortgagee sale:
1. The property is usually sold in its existing state
Mortgagee sale properties are commonly sold in their current condition. This may mean the property is damaged, or services do not work and there is usually no requirement for any repairs to be completed prior to settlement. Essentially, what you see is what you get.
2. The sale agreement will likely favour the lender
The mortgagee’s lawyer will usually prepare the sale agreement in the mortgagee’s favour. This usually includes refusing to provide the standard promises (or warranties) the seller of a property would normally provide a purchaser. For example, the mortgagee will likely not promise that any renovations done to the property have had the required consents or council sign offs, nor promise that the owner has not received notices or claims from third parties about the property.
3. You may receive very little information
The mortgagee may provide little or no information about the property due to the fact that they simply do not have such information. This could include key documents or reports such as a LIM report, building report, EQC information, or other usual due diligence material commonly provided by a seller to a buyer.
4. The property may not be vacant on settlement
It is usual for a seller to promise to provide “vacant possession” on settlement. However, in a mortgagee sale, this promise is usually not provided which can lead to increased costs and stress to a purchaser on settlement, especially if there are items or tenants that remain in the property and refuse to leave.
5. The property may be damaged before settlement
Even if, on settlement, vacant possession is provided, the mortgagee will likely not promise that the property will be left in a good condition. Junk may not be removed and the disgruntled previous owner may have damaged the property. The property is usually at the purchaser’s risk from the time the agreement goes unconditional so, ideally you would obtain insurance from that point, noting this may be difficult to obtain. This is different from the usual position which is that you obtain insurance from the date of settlement.
6. Access may be limited
The mortgagee may not be able or willing to give you access to the property, especially if the owner or tenants are still living there. This may prevent you from determining the condition of the property and arranging and completing due diligence (for example, a building inspection or valuation).
How can you mitigate the risks?
While the risks cannot always be removed, there are steps you can take to reduce them.
1. Speak to an experienced property lawyer early
Get legal advice as soon as possible. A property lawyer can review the agreement, explain the risks, and help you understand what protections, if any, may be available. This can help you decide whether you still want to proceed. Be prepared that their fee will likely be higher than a standard purchase due to the additional risk and work involved.
2. Investigate the property as carefully as possible
You should obtain and review whatever information is available about the property and its services. You should also be prepared for the possibility that you may not be able to obtain the usual information, such as a building report or full access to inspect the property. You will need to decide whether this is a “deal breaker” for you.
3. Check with your lender before committing
Make sure your lender is still willing to lend, despite the limited information and additional risks posed by purchasing at mortgagee sale.
4. Arrange insurance as early as possible
Subject to the terms of the agreement, you will likely need to insure the property from the date the agreement becomes unconditional. If the property is sold by auction, this will usually be from the auction date. Be aware that insurance may be difficult to obtain from this point as you are asking an insurer to insure a property that you do not yet own and there are uncertainties about occupation, access, or damage. If insurance is not forthcoming until settlement but the risk of the property sits with you prior to that, there are obvious financial implications for destructive events including but not limited to earthquakes or fires.
Mortgagee sales can offer genuine opportunities, especially for experienced buyers or investors who may be more comfortable taking on risk. However, any discount in the purchase price usually reflects the added risk. Buying a property through a mortgagee sale requires careful investigation, realistic expectations, and good legal advice before you commit.
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The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.
