Mortgagee sales - put your ducks in a row before you put pen to paper [Jun 2009]

If you buy a property at a mortgagee sale, be aware that you are entering a contract that is quite different in its nature from an agreement entered into in other circumstances. The agreement is likely to be weighed heavily in the mortgagee's favour as mortgagee sales involve factors outside the mortgagee's control, which it will want to protect itself against. This may include a very unwilling and penniless owner occupier who is being forced to leave their home by the mortgagee which assisted them to get there in the first place. In mortgagee sales there is little scope for flexibility in terms and conditions and usually the purchaser is left with a take-it-or-leave-it position.

It is not uncommon for purchasers to face difficulties after settlement, such as having to evict a previous owner occupier or having to deal with damage caused to the house by the disgruntled owner. In many instances, occupiers will take the chattels from the property and sell them to pay other sundry debts, leaving the purchaser with a shell.

Other common issues for purchasers at mortgagee sales can include:
• There is less protection for purchasers as the agreement usually does not include standard provisions. For example, the mortgagee will have removed the section in the agreement relating to the vendor's warranties and will have removed the right for the purchaser to approve title. Often purchasers will not be able to view the property beforehand as the owner will not allow an inspection, so it will not be clear whether work has been carried out that should have required a permit.
• Purchasers may not be able to claim against the mortgagee for late settlement/possession as there may be situations where the mortgagee is unable to evict the owner. Generally the mortgagee cannot guarantee vacant possession on the day of settlement.
• Once the contract is signed it is unconditional and therefore proper due diligence needs to be clear prior to signing. Even though a contract is unconditional, the terms may allow the bank to cancel the agreement prior to settlement if the owner pays the debt. This means the purchaser is often uncertain as to whether settlement will actually occur until the actual day of settlement.
• The mortgagee may require the purchaser to insure the property from the moment the agreement is signed, because the mortgagee ceases to accept responsibility for loss from the moment the hammer falls.
Buying a vacant property at a mortgagee sale reduces the chance of the house and chattels being interfered with prior to, or after, settlement.

Mortgagee sales offer an opportunity to buy a property at a reduced cost, but you need to know exactly what you are buying. To reduce the risk of problems occurring you must understand how the form of agreement works and undertake a thorough due diligence investigation prior to entering into the agreement. You should seek legal advice before the auction, as well as checking the title, council records and the property in advance, if possible. However, there may still be some issues that arise that are out of your control as purchaser.

The above is by no means a complete list of the issues that a purchaser could face, but it is a reminder to put your ducks in a row , or as many of them as possible before putting pen to paper.

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