What is a Repossessed Property?
For the investor seeking to buy into residential real estate in the United Kingdom and elsewhere, one avenue is the purchase of a repossessed property. This means a home whose former owner has defaulted on the mortgage loan, obliging the lender to go through a legal process which has ended in foreclosure of the owner’s interest in the property – otherwise known as repossession – and paving the way for the lender to sell the property as a way of recovering the debt or part of it. The Council of Mortgage Lenders, in the UK, estimated at the beginning of 2012 that the year would see around 45,000 forced sales initiated by first-charge lenders (primarily banks and building societies), well up on the 36,200 recorded in 2011.
A repossession sale may be either by private treaty, typically via an estate agent which has marketed the property on behalf of the lender, or – increasingly – by auction. Either way, the likelihood – and the attraction from an investment perspective – is that the property will sell for a price below, and sometimes well below, its supposed market value. Although banks and other lenders selling repossessed properties are legally bound to get the best price obtainable – which is why auctions are increasingly being used in place of private treaty transactions – the reality is that if all potential buyers know that the sale is ‘distressed’, the probability is that none will be willing to offer a market price. Bargain-hunting is the order of the day.
Of course, there are exceptions – a given property may be highly sought after for some reason and the fact that it’s a repossessed sale may not influence the bids unduly. That will be a rarity however and as a general rule – well established by numerous studies – homes sold at foreclosure auctions sell under the market, wherever the market is located. In New Zealand, for example, the website landlords.co.nz recently asserted that foreclosed properties (referred to there as ‘mortgagee sales’) are going under the hammer for about 25% below their market value. Whilst this appears to be based only on interviews with a few estate agents, it’s a figure closely matched in the US, where the foreclosure sales specialist website realtytrac.com reports that, with the over 233,000 distressed sales in Q1 of 2012, the ‘average sales price was 27 percent below the average sales price of homes not in foreclosure or bank-owned during the quarter – down from a 29 percent foreclosure discount in the first quarter of 2011.’
Accessing Repossessed Property for Sale
Finding repossessed properties for sale may not be a straightforward process. In the UK, for example, there is no national database for such sales and it will be a case of monitoring either physical media – the property sections of daily newspapers, for example – or, increasingly, the websites of auction houses and the growing number of businesses offering property auction-related services. Another source of information is of course estate agents, especially if you have a specific location in view. The agencies in that area may not be bothered with marketing forced sales but chances are they’ll know about them.
Different countries – and even different parts of the same country – will have different rules for the process of buying a repossessed property. The UK is a case in point, with the rules which apply in England being quite different from those in Scotland. And speaking of England, as with the purchase of any other real estate there is the prospect of being gazumped before the exchange of final contracts. In the case of a foreclosed property, there is a specific notice period – of seven days – which the lender (ie, the seller) must give via newspapers, its website etc, after an offer has been received during which anyone is free to come in with a higher offer. Incidentally, this isn’t the case with a sale by auction – one potential advantage of seeking to buy a repossessed property by this route.
Inherent Dangers when Buying Repossessed Property
Buying a repossessed property needs careful consideration – and preparation. This is especially so when buying at auction, with a binding contract being formed literally on the fall of the hammer. The investor should satisfy themselves first and foremost that the vendor has all necessary legal capacity to complete the sale and, crucially, to transfer unfettered title to the purchaser. In the background of a foreclosed sale is invariably a story of personal tragedy – the buyer’s good fortune at picking up a desirable rental property at a discount comes at the expense of a home-owner, and probably occupier, who has fallen on hard times. And, except in ‘no-recourse’ jurisdictions – such as some states in the US, the foreclosed sale does not relieve that former owner of any debt overhang after the selling price has been applied to the loan arrears.
So, the lower the selling price, the more aggrieved the foreclosed owner is likely to feel. From their perspective, if more is owed than the sale price produces, the fall of the hammer may leave only bankruptcy as a refuge from the remaining debt, though there are some countries – notoriously Spain – where property-backed debt is not relieved by bankruptcy.
It goes without saying that the investor will want to be sure that with title comes vacant possession. Possibly the most difficult thing for a newbie or long-distance investor to deal with is persuading a ‘squatting’ former owner to leave. Whilst the law may be 100% behind the buyer, who is entitled to and indeed obtains a court-issued eviction notice, the situation may well be otherwise at the emotional level. An allied consideration is that the buyer at a foreclosure auction is unlikely to have access to the detailed information about the property that only the previous owner can supply.
For sure the bank, its estate agent or an auctioneer won’t know of any idiosyncrasies about winter preparation, for example, or damp prevention or how not to fire up the oil-fired boiler. So the investor bidding at the mortgagee auction needs to learn about such things either from personal inspection or, if that’s not possible, by heavy reliance on a reliable agency of some form. Keep in mind that such seemingly small matters could have consequences later – perhaps years down the track. If for example unpermitted alterations had been undertaken on the property and were somehow instrumental in a fire or other damage, the buyer’s insurer may refuse to pay out if the alteration had not been disclosed when the policy was written.
Condition of the Property
The same cautious approach goes also for the condition of the property at the time of sale. Many repossessed properties sell at a big discount to market because, by the time the sale comes up, they’ve regressed to a poor condition. The property may have lain vacant for months, even years, with its every exposure to the elements left untended, notwithstanding a legal obligation on the lender to maintain the property following foreclosure. Perhaps the foreclosed owner has re-entered at some point and removed certain fixtures or fittings. Or it’s been broken into and thieves have taken everything movable. There are any number of scenarios but the point here is that inspection just prior to the auction is an absolute must.
Of course, there may be warranties offered by the bank-vendor which the investor can legitimately look to rely on post-purchase but that could prove a lengthy process – with out-of-pocket lenders loath to shell out a penny more than they absolutely have to – and meantime leaving the investor to carry the cost of expensive repairs and replacements.
Finally for now, as part of a pre-auction ‘due diligence’ the investor should pay close attention to the neighbourhood – is the property an isolated foreclosure sale or is the local area full of them? If the latter, what impact is that having on renter perception of the locality? What will be the view in the neighbourhood of the buyer and, by extension, of the tenants found for the property post-purchase? The investor should ask themselves this question – would I want to live there? If there are reservations, this should sound a warning note.