Banks often sell repossessed properties for less than the value in the open market because they want to recoup their costs as fast as possible. This means that buying this type of property can be a great way to invest in well-priced property - provided you know what to look for.
The three basic types of repossession sales that take place all have different processes that can affect their price and potential value. They are:
- Sales in execution
- Bank-mandated sales
- Properties in possession
Sales in execution
Sales in execution are always carried out by means of auction, and the minimum reserve price on the property is often far less than property’s market value. This is because the main purpose of the sale is to recover the outstanding debt owed to the bank by the mortgage holder and any associated legal costs as quickly as possible rather than to achieve a good price.
Sales in execution can offer outstanding value for investors, especially because the bank that owns the property often offers preferential financing. For example, approved buyers could be granted 100% loans or significantly discounted bond fees. However, you will still need to pay a deposit – usually around 10 percent – immediately on purchase. Other fees include the sheriff’s commission, a percentage of the purchase price.
When considering a sale in execution property, be sure to read the conditions of sale very carefully before putting in a bid on auction. This is because you may find yourself responsible for any outstanding rates, taxes or levies on the property, as well as all costs to do with evicting any tenants - or the previous owners - if that becomes necessary.
Bank mandates
Bank-mandated property sales tend to be listed at more realistic market-related prices, so they are not as much of a bargain as sales in execution or properties in possession.
This is because they are primarily voluntary sales by the owners – the mortgage holders – and arranged to release them from a bond that has fallen into arrears. The mortgage holders give the bank a mandate to sell the property on their behalf to settle their debt, and the bank is then responsible for appointing an estate agent to market and facilitate the sale.
As with a typical property sale, the owners have the right to refuse an offer to purchase. They are under no obligation from the bank to accept lower offers than they otherwise would.
If a bank-mandated property doesn’t sell, or the owners choose not to accept any offers despite not being able to meet their monthly repayments, the bank can proceed with legal action. Before taking this step, banks must obtain a judgment from the High Court against the defaulter. Once this has been granted, the property can be attached and sold by the sheriff at a sale in execution auction.
Properties in possession
If a property does not reach its minimum reserve price on auction, the bank buys it back, becoming a property in possession - a bank repossessed property.
Like sales in execution, properties in possession are usually priced to sell quickly, and buyers may benefit from the same preferential financing options.
However, unlike sales in execution, offers on repossessed properties are made directly to the bank through their appointed estate agent. The offers are accepted or declined at the bank’s discretion.
Repossession is usually a bank’s last resort to recoup its losses on a mortgage, so low offers are more likely to be accepted for these properties than any other type of distressed property.
In addition, transfer duty does not apply to properties in possession, so they have the potential to be both affordable and profitable investments.
One problem is that bank repossessed properties have usually been on the market for some time without selling, and there may be good reasons for this. Most mortgage holders who can’t afford their repayments are unlikely to spend on maintenance and improvements.
Other factors to keep in mind include:
- Transfer of a property in possession can take up to six months.
- Buyers could be responsible for arrears on rates and taxes and the eviction of any tenants, as with sales in execution.
- Viewing properties in possession can be tricky because the owners or tenants may not be amenable.
- It may not be possible to have a professional inspection done.
Although there are some risks involved in buying distressed properties - as with any investment - the potential rewards are significant.
To learn more about investing in distressed properties, visit the home loans section of the major bank websites.
Writer : Sarah-Jane Meyer