A mortgagee sale is often a chance to grab some bargain but purchasing at mortgagee auction is not without its risk.

In this blog, we are going to cover what a mortgagee sale is, what the potential risks are, and if you can borrow to buy a mortgagee sale property.

Buying a mortgagee sale

Video Timeline

1. What is a mortgagee sale? - 01:06

2. What are the risks of buying a mortgagee sale property? - 02:22

3. Can I borrow to buy a mortgagee sale property? - 04:38

What is a mortgagee? 

A mortgagee is a party, normally a bank or finance company, that lends money to another party (the mortgagor) and takes security for the loan over the assets, such as properties.

What is a mortgagee sale?

A mortgagee sale happens as a result of the mortgagor not repaying their home loan over some time, and after completing some legal procedures, if the mortgagor still can’t meet their mortgage repayment obligations, then unfortunately, the mortgagee exercises its power of sale through auction to recover its debt.

Mortgagee sales are often seen as the last resort if the mortgagor cannot repay their home loan on time. If everything is fine, there won't be a mortgagee sale. However, the mortgagor’s health, job and everything can change. For example, the home loan interest rates can go up to the roof some time, like during the GFC (Global Financial Crisis) period, the interest rate was approximately 10%, but you may not be able to catch up the extra rate payments.

What are the risks of buying a mortgagee sale property?

The prices are usually lower than for houses that are not subject to a forced sale, but buyers do face potential risks when buying at a mortgagee sale.

If you buy a property at a mortgagee sale, be aware that you are entering a sales and purchase agreement that is under different terms and conditions:

No guarantee on vacant possession

Some mortgagee sale properties are not offered for sale with vacant possession. There is no assurance that you will be able to move in the property on the day of the settlement. If you’re looking to buy your first home, that is not a favourable condition.

No guarantee on the condition of the property

It is not uncommon for buyers to face difficulties after settlement having to deal with damage caused to the house by the disgruntled previous owner. So, the condition might be poor in some worst-case scenario.

No guarantee on the chattels

Chattels such as ovens, dishwashers, curtains, and carpets often come with a standard property purchase. But in a mortgagee sale situation the chattels are commonly not included in the S&P Agreements. Even they are included, no warranty on their working conditions.

No guarantee on building permits

The mortgagee sale property generally does not give warranties regarding building permits, Code of Compliances, or boundaries. This means no warranty that any works done at the property have been approved by the Council or are compliant with any applicable building codes.

These are just some examples. In a mortgagee sale situation, many of the usual protections for buyers are not included in the Sale and Purchase Agreement. To lessen the chance of problem occurring, you must understand the agreement thoroughly. It’s important to have your solicitor involved as early as possible and help you review each term and condition, specifically those special conditions in the S&P Agreement, then you can ensure your purchase price can fully cover the costs that you’re going to spend on the property.

Can I borrow to buy a mortgagee sale property?

Generally, if you’re considering buying a property at a mortgagee sale, your bank will impose two additional conditions before they can accept the property as security.

1. Before settlement, if any damage or destroy happens to the property, this will affect the house condition and cause loss for you. The banks want your solicitor to confirm in writing that they have gone through each clause in the agreement with you and you are fully aware of the risks, legal obligations and complication.
2. Your bank also needs a written confirmation from the vendor's solicitor that all caveats will be discharged (removed) prior to the settlement.

We have covered the first point in the previous section. Now let’s talk about the second point - some common issues on the titles at mortgagee sales can include:

The vendor's current lender, normally the bank, is on the property title as the first mortgagee. Sometimes, there are other special wordings in the title, such as second mortgage or caveat, which are the security arrangements ranked after the banks.

For example, if the borrower borrowed money from someone else and someone else registered a second mortgage or caveat, just in case the borrower does not repay back. By this way they have security arrangement on the title. It's not as strong as the 1^st ranking mortgagee because they're ranked behind the bank, but at least it prevents the owner of the property from selling the property without the caveator’s (who filed the caveat) consent.

Before buying a mortgagee sale property, please ensure the vendor can repay the loan and all other security arrangements can be removed on settlement, which is not always feasible. Sometimes they just don't have enough money to pay back. As a result, the settlement can be severely delayed. As you have already declared unconditional contract, you are obliged to complete the purchase, but you are unable to know when the settlement will occur. It could make you very stressful.

You should seek legal advice before the auction as well as checking the title, such as what is on the title of the property? How likely are second mortgage or caveat, if applicable, can be removed on settlements? Get your sellers involved and the sellers normally need to work with the vendor's solicitor and make sure these matters are properly addressed.

The above are the potential risks that a buyer could face when buying a property at a mortgagee sale and what lenders will look for before they can accept the security and lend you the money on settlement. It is a reminder to have your ducks in a row before putting pen to paper. We highly recommend you do a thorough due diligence prior to the auction and get your solicitor involves as early as possible.

If you are comfortable with the risks involved and can meet the bank’s approval conditions, then it’s worthwhile to give it a try and set a reserve price because you are more likely to get a bargain and build some instant equity on settlement. 

Prosperity Finance – here to help

We are mortgage broker in New Zealand. If you’d like some home loan help, we’re here to help. Call us at 09 930 8999 for a no-obligation chat with our adviser.

Other Blogs You Might Like:

How to take advantage of 80% LVR on investment property loan and lock it in?

2019 ADLS Agreement Changes for Sale and Purchase of Real Estate

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.