When looking at properties available for sale, it is not unusual to be attracted to properties advertised as a ‘mortgagee exercising power of sale’.
These properties are being sold because the owner has defaulted under their mortgage and the bank exercises its right to sell the property to recover monies owed by the property owner.
Bargains – But Not Without Issues…
Buying property from a mortgagee exercising their power of sale can be an effective way of buying real estate at an attractive price BUT bear in mind that that the bank is obliged to try to obtain ‘fair market value’ for the property. Often the property is seen as being cheap because of the harsh conditions that the selling mortgagee imposes as on buyers as part of the terms of sale. Buyers need to understand that the reason for the reduction in value is largely due to the increased risk that prospective buyers are exposed to when they enter into a contract of sale with a mortgagee.
Unusual Contract Terms
Because the mortgagee is generally not familiar with the property (it’s likely that they have never physically inspected the property), the contract terms are usually amended to provide for:
- an ‘as is where is’ deal where a buyer can not pull out of the contract even if they discover adverse search results or defects in any building on the property;
- standard warranties usually given by sellers are almost always removed unless they are not capable of being removed by legislation;
- a buyer is not entitled to a cooling off period and will not be allowed any conditions relating to obtaining finance approval or due diligence;
- a deposit of 10.00% is payable on signing a contract;
- if there is a pool and no pool safety certificate exists, a buyer is not entitled to a Pool Safety Certificate or entitled to terminate the contract due to the seller not providing one;
- if the owner is being difficult and alleging the mortgagee has not exercised its rights properly and the mortgagee cannot settle on the settlement date, the mortgagee can choose to either:
- 1. terminate the contract; or
- 2. extend the settlement date by a period up to 3 months;
- (if this happens a buyer will not be entitled to damages or compensation for the delay or loss of the deal); and
- if any chattels included in the contract are missing, damaged, defective or otherwise removed before the settlement date then those items are excluded from the contract and a buyer cannot object or make a claim for compensation or seek to terminate the contract.
Condition of the Property
Since a buyer is usually required to accept the property in an ‘as is where is’ condition a buyer will typically have to accept any:
- faults and defects;
- pest, termite & vermin issues;
- defective improvements on the property that may not have the appropriate approvals in place; and
- adverse issues relating to the property such as state and local government authority land requirements.
Buyers should make careful property inspections and extensive search enquiries about the property BEFORE signing a contract for a mortgagee sale.
If you are looking at a property that is being sold by a mortgagee you should also consider that there may be a good reason that the property is being sold and the property owner was unable to service the debt. It is not uncommon for the property to be damaged and not capable of being tenanted.
No opting out
A mortgagee will incur a number of costs to get to a stage where they can sell a mortgaged property. Generally speaking, by the time the property is ready to be sold, a mortgagee:
- may have given a property owner substantial notice periods and often provide more time than what’s required to ensure there is no doubt they have given the property owner every opportunity to remedy the default;
- spent significant time negotiating with the property owner and granting a number of extensions of time to remedy the default;
- may have had to go to court to obtain vacant possession;
- had at least one evaluation of the property completed;
- outlaid significant costs for advertising campaigns and auctioneers fees;
- may have had to make repairs and perform works to the property to make it more attractive to buyers;
- lost opportunities while repayments are not being made.
Needless to say, if a mortgagee exercising its power of sale finally finds a buyer they do not want that buyer pulling out of the deal if the buyer suddenly gets cold feet.
Tough Negotiations
If you are considering buying from a mortgagee, you must keep in mind that it is the mortgagee’s objective is to recover their debt. The mortgagee also has a duty to the property owner to take reasonable steps to obtain market value for the property. This means that you may not be afforded some of the niceties and concessions that are granted under an ordinary sale contract. The market may have changed since you entered into the contract and if the mortgagee becomes aware of a better offer than and you are not ready to settle on the settlement date, the mortgagee may be obliged to terminate your contract and enter into the new contract on better terms.
Disclaimer (the usual fine print) …
The above information is not an exhaustive list of the issues to consider when buying from a mortgagee exercising their power of sale. This article is not advice and is only a general guide. Each contract will have its own specific requirements and you should obtain specific advice from us relevant to your particular circumstances.
Can We Help?
Our experienced property law team deals with mortgagee exercising power of sale contracts on a regular basis and we understand the commercial requirements for buyers and the mortgagee in these transactions. Please contact our Toowoomba Lawyers, if you are considering purchasing a property from a mortgagee exercising their power of sale and would like further advice or assistance.
Prepared by Tony Randall
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.
