Buying at mortgagee sale - traps and pitfalls [Aug 2008]

It is quite apparent at the moment that there are a lot of properties being offered for sale as “mortgagee sales”.  The perception is that these properties come at a bargain.  However, one has to be very careful when buying a property at mortgagee sale that you know all the traps and pitfalls.  There are plenty of them.

A mortgagee sale property may be sold by the mortgagee either under auction, tender or by straight forward Agreement for Sale & Purchase.  However, mortgagees selling property de-risk the sale from their point of view in many ways.  This places the risk right back on the purchaser.  For example, there will be no right to approve or disapprove of the title.  There will be no LIM condition in the agreement.  Some mortgagees will refuse to accept any conditions such as finance or a builder’s approval clause.  Therefore, you will be signing an unconditional contract and you will have to have done your preparation beforehand on all these sorts of issues.  In addition, the mortgagee will take many of the promises normally given by vendors out of the standard agreement.  There will be no warranty or promise as to the building and its compliance with the Building Act and Code Compliance Certificate requirements.  There will be no ability for the purchaser to sue the vendor for defaulting on settlement or late settlement.  Often the mortgagee will place the risk of insurance of the building on the purchaser from the moment the contract is signed or unconditional which means you have to get the insurance arranged prior to entering into the contract.

Often the mortgagee will sell the property with tenants in place or even with the original owner still in place.  Sometimes the owner is simply refusing to move out and may be in dispute with the mortgagee over the whole sale process altogether.

The message from all this is that purchasers will have to do a lot of their homework before they enter into the contract rather than after the contract is signed which is norm.  They may well go through and expend a considerable sum of money in checking titles, the building, Council LIM’s and all the other sort of investigation of the property before they can even sign up a contract.  In many cases they may be expending this money without the certainty they will even get a contract at all. 

However, once they have a signed contract with the mortgagee they may find that the mortgagee has provisions in the agreement allowing the mortgagee to withdraw from the agreement if the original owner manages to pay up the debt or takes an injunction to stop the sale going through or another mortgagee steps in to carry out a sale instead.  In other words, in some cases the buyer may not be sure they are going to be able to complete the sale until the day that settlement actually happens.  They may go to some lengths to arrange finance and organise themselves for settlement only to find that they may not be able to complete settlement.

All the above suggests that it is very important for purchasers at a mortgagee sale to factor all these issues into the price they are offering.  Buyers ought to accept that it is not necessarily a very simple process or one that is not without its shortcomings. 

Having said all that, with the right amount of investigation and preparation buying a property at mortgagee sale can be a rewarding exercise.  In the current market there are more properties being offered for sale in this manner than there have been for many years.  That is really a consequence of the current financial markets.

To recap on the points above:

• Ask the agent for a full copy of the form of contract and have your lawyers review it thoroughly to point out the limitations and variations from the standard.
• Carry out your investigations before you enter into the contract and beware of the pitfalls.
• Ensure your lender is aware that you are buying under mortgagee sale.
• If you purchase, make sure you insure the property immediately you sign the contract.

If in doubt get some legal advice first.

For more information contact Tim Jones at .(JavaScript must be enabled to view this email address)

The contents of this newsletter are of a general nature only. While the information is believed to be correct no responsibility is accepted for its accuracy. Readers are advised to establish the applicability of information in relation to specific circumstances and not to rely solely on the text of this newsletter.

View Tim Jones Profile

Search Publication Library