The catch with mortgagee in possession sales

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

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’

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.

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