So to clarify what are mortgagee possession properties?
Okay so I will break it down for the beginners or folks who still don’t quite get it. When someone sets out to purchase property in Australia, typically what happens is they will borrow the money from one of the big four to help purchase that home. In doing this, the lender is the one who takes a mortgage in order to secure the loan. And as we’re all aware, if someone is unable to maintain payments according to the terms of the loan, it gives the lender permission essentially to take possession of the secured property.
When this happens, usually what the mortgagee will do is take the property and arrange for a sale by private treaty or most commonly by public auction. All of the proceeds that are received from the sale of the property are then used to offset any legal costs, maintenance expenses, and of course pay off the outstanding balance of the loan.
There are a lot of opportunities in this process and over the last decade or more, purchasing property from a mortgagee in possession is becoming more and more popular worldwide. These types of purchases are a great opportunity for investors and future homeowners to purchase homes at significantly less than what the current market value is. While some individuals have difficulty morally with profiting from someone else’s loss, everyone loves a bargain.
Considering the Purchase
It doesn’t matter how you buy the property, via private treaty or auction, the first thing is to make sure that you are properly prepared. Here are a few quick tips you need to have ready and take into consideration before you decide to purchase a property:
- Make sure your financing is arranged early. In most cases, settlement periods are usually short when you purchase property from a bank, and you can’t expect them to be flexible. They are looking to off-load the property as quickly as possible which is why a lot of auctions require proof of financing or access to fund for you to even be eligible to participate. If you arrange your financing before you go looking for a property to purchase, you’ll know exactly how much money you can spend and it will help make your purchase run smoothly. On this point also make sure you know the bank will LEND you funds on the SQ meterage of the property (banks don’t like studios) and I’ve seen a lot of finance fall through and lose 30k+ because they didn’t think about this L
- Obtain a reliable lawyer so they can have your paperwork in order within the short settlement period. You want to make sure when you choose a real estate lawyer that you pick someone who has extensive experience in handling these type of settlement transactions and yes they are a little different to the normal contract for sale. Choosing the right professional will ensure that all required paperwork is filled out and filed and they can eliminate the risk that you receive any penalty fees for late settlement. What I do is call about 10 lawyers and ask them if they have had experience with these before and most will be upfront about it.
- Expect to have to spend money for repairs. In some cases there is a small due diligence period prior to the auction where interested parties can gain knowledge about the property, but unlike a standard sale where there is time for an interested buyer to order an appraisal or review of the home, with settlement properties, usually the last owner has to leave in a hurry. Also, since they are not in a position where they will be directly profiting from the sale, they very often don’t care what state they leave the property in when they leave. After all, if someone is losing their home, in 99% of the cases it’s due to a financial hardship. If that is the case, they probably had no money for repairs or home improvement. When you’re figuring out how much money you are borrowing, include a good budget for home repairs and improvements. I’ve seen some places where they have tried to rip out the inbuilt wardrobes to take with them and were unsuccessful and what was left was a big pile of mess!
- As with anything, always expect the unexpected. To help alleviate this a small degree, make sure you take full advantage of any opportunities for last-minute inspection before you finalize any property purchase. If you don’t you are likely to run in to a few unpleasant surprises. When someone is faced with the stress that occurs when they are forced to lose their home, it can often make them do strange things. Some have been known to remove appliances, sinks, toilets, etc. One person attempted to set their home on fire, luckily the bank found the damage and repaired it before the sale. Yep there are some crazies out there!
- Try not to buy property without seeing it. It can be very tempting to purchase a property online if the property is far away, especially if it seems like a great bargain. While you may be getting what you expect, it is very easy online to make any property look better than the actual state it is in. You won’t be able to tell the actual state of the property if you haven’t actually seen it for yourself. In the event you are not able to physically inspect the property, engage a local broker or professional to do it in your place. There are services out there that assist with auction sales and often times also have great connections to help you after the purchase of the property with obtaining vendors for any of the repairs that will need to be done and these are the type of people you want to know!
- Do thorough research of the area. This is true in any situation and goes without saying right? Well apparently folks still don’t do it, especially if you are looking to purchase the property for a quick flip or to add to your portfolio as a rental investment property. Here are few things to looking into:
- Check to see if the area growing or is it depressed, is it close to good schools, shopping, medical care, etc.
- Look at property prices and see how they have behaved recently.
- Determine the chances for capital growth between the time you purchase the property and when you want to sell the property.
- Check out the local vacancy rates and rental yields. (important)
- If you’re relocating, look at the employment opportunities.
Remember, banks and lending companies are eager to sell the properties, so you will be able to get bargains, just make sure it is the right bargain to meet your needs.