Australian Property News

The catch with mortgagee in possession sales

Posted on Thursday, July 05 2012 at 12:04 PM

A lazy half a million dollars can go a long way at a mortgagee auction, however buyers should scrutinise every detail of a property and its contract, according to Herron Todd White’s (HTW) July edition of The Month in Review report.

It’s prime time to buy a good quality, centrally located Gold Coast property for under $500,000, with Burleigh Waters, Mermaid Waters and Miami perfect examples, says HTW’s Gold Coast and New South Wales far north coast director Tod Gillespie.

He says Gold Coast investors are certainly responding to the reduced prices, with a 50 per cent increase in the number of valuations for May since November last year. “We also expect July to be a strong month – with activities from buyers who have been waiting for the owner-occupier stamp duty concession to be reinstated.”

Increasingly buyers are taking advantage of significantly reduced priced properties as a result of mortgagee in possession sales, particularly because the distressed vendor has little option when negotiating a sale, says Gillespie.

While administrators and mortgagees owe a duty of care to dispossessed owners to achieve the highest price possible, the distressed vendor is negotiating from a weakened bargaining position in that, unlike a normal vendor, they can’t withdraw the property from the market if the offers to purchase aren’t to their liking, he says. “They just have to press on and get the best price they can.”

The longer the mortgagee property sits on the market, the more the mortgagee’s bargaining position slides due to interest accrual on the debt and the cost to maintain the property in a saleable condition, explains Gillespie.

“This means that if you have pre-approved finance or, for the lucky few, cash, you’re in a strong bargaining position. A fair offer, cash unconditional with a short settlement would be a very attractive proposition for a distressed vendor.

“Even if the bidding doesn’t make it to the reserve, as the highest bidder you have first right to negotiate following the sale, giving you the edge over those buyers that can’t or won’t bid at auction. Our research shows that many of these properties will be sold at up to 10 per cent less than the reserve on auction day.”

Just because the bargain price might be pushing emotions to a record high, buyers shouldn’t lose their heads and forget to undertake due diligence as with any other property, says Gillespie.

Buyers should also seek legal advice on the contract of sale because many mortgagees will insert non-standard clauses into the sale contract to protect their position, he says.

“They will often sell a property with known defects and insist on a sale ‘as-is, where-is’ with no warranties as to known or unknown issues, which may affect the property. Make sure you’re happy with the terms and conditions offered.”

Rob Balanda of Gold Coast-based MBA Lawyers says he’s observed an increase in the volume of mortgagee in possession sales since the global financial crisis.

He says the non-standard clauses have actually become standard for contracts on properties in mortgagee possession.

They include: the buyer’s acceptance of the property in its present condition; no guarantees or warranties provided, nor disclosure if the property has been earmarked for resumption, or affected by road dedication and road widening; no disclosure if approvals are required or have been rejected for non-compliance; no disclosure of hazardous substances existence; no disclosure of the property’s area and dimensions; no disclosure of the ability to construct any extensions on the property.

What this means is the buyer will need to undertake a long list of checks and searches to protect oneself, so adding in a due diligence clause is crucial, Balanda says.

He adds that buyers should first check if lenders are prepared to accept a ‘buy as is’ contract.

Buyers should always keep perspective, says Gillespie. “Just because a property is being sold by a mortgagee doesn’t make it a bargain. If it’s on the main road, next to a train line, under a flight path, full of defects, it may not be the bargain you think it is. Conversely, the property may be in a tightly held area or have particularly strong attributes, which leads to strong competition among buyers. The mortgagee may achieve a very good sale price as a result.”

Spending a few hundred dollars on an independent valuation of the property will sort out if it’s really a bargain or not, he says.