How they work
We’ve all heard about these. Sometimes called ‘mortgagee in possession’ sales, or ‘mortgagee auction’ sales, even ‘foreclosures’, the result is the same: a property owner defaults under the mortgage, and the bank sells the property up. The image conjures up phrases like ‘rock bottom price’, ‘take it or leave it’ and ‘as is where is’, some of which are pretty accurate, others not so much. What you can be sure of is that the sale conditions are different.
Sales under the hammer
Although you can buy the property outside of the auction environment, the most common method of mortgagee sale is at auction, so it’s important to understand your legal position before you bid.
TIP: note if a property has already been passed in after auction, you can negotiate a deal with the mortgagee through the agent. That is, the deal does not have to be concluded only at auction.
What a steal!
None of us want to pay more than we have to, but it’s not quite true that mortgagees will sell at just any price, or at a price sufficient to clear just what they’re owed. The law requires that they sell at market value (best established via auction), and account to the defaulting borrower for any proceeds above what is owed under the mortgage. Also, banks don’t want to engage in fire sales: fire sales lose money, adversely affect banks’ balance sheets, share prices, and investor confidence!
So your offer needs to be reasonable. The upside is that you’re certainly unlikely to be paying premium, and a key reason for this is that the mortgagee will have changed a number of the standard conditions, discussed below.
The conditions: as is where is Typically, mortgagee sale conditions remove a number of due diligence type rights available to buyers, and strip the sale back to the bare minimum. Each mortgagee has its own conditions, and so it’s impossible to advise specifically on them unless we see them. However, the following is a general guide to some possible changes mortgagees can make:
- Buyers need to satisfy themselves that the use to which they want to put the property is lawful. They’re also expected to have satisfied themselves with the condition of the property, quality, fitness for purpose, existence and lawfulness of access, issues regarding resumptions by any authority (eg resumptions by Main Roads dep’t), existence of any approvals or licences, and environmental protection related notices.
- Common sense will frequently answer a lot of these questions when it comes to buying residential land, but if buyers are considering a commercial application, it may pay to speak with us, or a planning consultant, or Council (or all of the above) first.
- Some mortgagees require settlement to be effected even if there is outstanding land tax payable, which is often the case.
- Although the mortgagee may still be required to pay, you might not be able to demand it be paid at settlement.
- Usually the sale price in a contract is expressed as GST inclusive.
- Sometimes (especially if a mortgagee is selling development stock), the price may exclude GST, and you could be required to pay this on top.
Assignment of warranties
- If a building is new or relatively new, a mortgagee might exclude the assignment of any builder’s warranties that might otherwise be assigned.
- Similarly, any warranties under a tenancy agreement (and the agreement itself) will not be available for assignment or delivery at settlement.
- You can’t terminate or claim compensation if lot boundaries are inaccurate.
- Also, if you establish (for example) an encroachment on to or from the property during the contract, you’ll not be able to terminate or claim any compensation.
- If the mortgagee owns adjoining lots (eg balance developer stock), it’s likely that they’ve removed their obligation to contribute to fencing costs (under dividing fences legislation).
Removal of reserved items
- If the property consists of improvements, the mortgagee may remove any obligation on it to clear away all items not included in the sale (such as abandoned goods), leaving these items for you to deal with post settlement.
- The usual process in a conveyance is for a seller to ask a buyer to agree to extend and the parties then negotiate. In a mortgagee transaction, the mortgagee can often extend settlement unilaterally, for a several months.
- This may impact on your financing, timing, moving out of other properties etc.
- The mortgagee will warrant nothing, and exclude warranties written into the standard terms, such as being able to settle on time, or at all, that there will be no unsatisfied judgments or writs attaching to the title at settlement, or existing issues under environmental protection legislation.
- It will often exclude any obligation to deal with any notices from any authority (eg a council notice to clear an overgrown allotment or remove illegal structures
Where does this leave the buyer?
These amendments don’t mean you’ll have to settle without clear title, as that remains assured. Rather, it just means you’re not allowed to carry out as many checks as you otherwise could. Remember also that some mortgagees are negotiable, so don’t be afraid to ask. Common sense usually prevails and mortgagees may bend a little on some issues they have control over.
As indicated, this is general information, and not legal advice. Every contract is different and requires contract specific advice, which we’re happy to give.
If you’d like more information on any of the matters raised here, or if you’d like us to look at your mortgagee sale conditions just give us a call.