Bank possessed properties: How to land a bargain

Dominique Grubisa
Dominique Grubisa

Published 2:04 am 5 Jan 2021

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One of the most successful strategies for making money through property is to buy a house or unit for less than its true market value and then re-sell it later for a higher price. This can be achieved through sales of bank possessed properties read on to learn more.

Sales of repossessed or bank-owned properties offer would-be investors the potential to do just that. Brought to the market when a mortgage holder has failed to make payments over an extended period, such properties are often sold in poor cosmetic condition and are viewed by regular buyers as having a stigma attached to them. As such, they can often sell for less than their true market value. Savvy investors can snap up some bank-owned properties for between 10 and 40 per cent below market price. By carrying out renovations, making cosmetic changes and conducting a smart sales campaign, including staging with attractive furniture, investors can then further boost the potential profit at sale time.

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That said, not every bank-repossessed property sale represents a bargain. In many circumstances, competition between investors and property flippers can be intense, driving up the price and negating the potential benefits of buying a so-called distressed property. The final price may even be above market value.

If you’re interested in buying a bank-repossessed property, it pays to understand the mechanics of how properties are repossessed and where the best opportunities lie for buying such homes.

Banks and repossessed houses

The term ‘bank-repossessed property’ typically refers to a situation where a home owner (mortgagor) has missed so many repayments that their lender (the mortgagee) has stepped in and taken possession of the property. The mortgagee (typically a bank) then seeks to recoup the money it is owed by selling the property. Because the mortgagee is the party selling the property, bank-repossessed sales are also called ‘mortgagee-in-possession’ sales.

Banks are sometimes portrayed as greedily waiting for mortgage holders to default on their payments so they can seize control of their properties. However, the reality is that most banks don’t want to repossess homes. Their core business is lending money. Buying and selling properties represents work outside a bank’s key competence areas as well as added risk. When a homeowner cannot repay their loan, an arduous legal process is triggered that can sometimes last over a year.

The process usually goes something like this:

  • A first monthly loan repayment is missed by the borrower and the lender issues a reminder to catch up.
  • If the lender receives no response, the matter is passed to an internal collections department. The lender will usually continue to try to help the borrower by suggesting a change to repayment arrangements.
  • After 90 days, the lender may engage outside collections or legal services to pursue the money owning.
  • Next, a Default Notice is typically issued, giving the homeowner 30 days to pay arrears, or the whole loan falls due. Borrowers can still apply for a hardship variation via the Australian Financial Complaints Authority (AFCA) at this point.
  • A Statement of Claim for Possession is next issued, which is a Supreme Court proceeding seeking to recover everything owing on the loan, plus interest and legal costs.
  • A Sherriff’s order will then be issued informing the borrower to vacate by a nominated date (a minimum of 30 days) and that the locks will be changed.
  • Once the borrower is out, the final steps involve the lender assigning a real estate agent who puts the property up for sale.
  • A quick but fair sale is now the priority. If the proceeds from the sale exceed the unpaid debts, the borrower may get something back. Often, the home sells ‘as is’, unrenovated and with minimal investment on presentation. However, in cases where it considers it worthwhile the bank may invest in repairs and display furniture.

It’s important for potential investors to note a couple of key points from this process:

  • The bank doesn’t directly sell repossessed homes (even though they take over ownership);
  • Real estate agents are appointed to sell bank-owned properties;
  • Properties repossessed by lenders that go up for sale are often unrenovated and don’t have much investment in their presentation;
  • Bank-owned sales differ from standard sales. The properties concerned may not have had ordinary repairs, so the onus is on the buyer and/or bidder to have the property independently inspected, valued and have the contract inspected.

How to find repossessed homes in Australian cities

The economic conditions created by the COVID-19 pandemic mean huge numbers of Australian homeowners are suffering from mortgage stress – in other words, having difficulty making their mortgage payments. Some of these homeowners will eventually default on their mortgages, leading to their lenders repossessing their properties.

Economists predict there will be significant numbers of bank-repossessed property sales in Australian capital cities including Brisbane, Sydney, Melbourne, Perth and Darwin.

When it comes to finding bank-owned property listings there are a few options to consider. Even in the digital age, ‘who you know, not what you know’ still holds true: if you have a relationship with a real estate agent, or buyer’s agent (also known as a buyer’s advocate), ask them to let you know as soon as they become aware of a suitable repossessed home.

That said, the internet can also be used to produce leads. Try entering search phrases such as:

  • Repossessed homes for sale
  • Bank-owned homes for sale
  • Mortgagee sale
  • Mortgagee-in-possession sale
  • Forced home sale
  • Distressed property

A word on search terms: looking for ‘foreclosure sales’ may not bring you much joy. Foreclosure – where title on the mortgage is transferred to the lender’s name – is commonplace in the United States but rare in Australia. Here, lenders usually prefer to get a court order to force the mortgagor to sell, without a change to the property title.

Several websites position themselves as providing repossessed homes for sale. These include australia.trovit.com, mitula.com.au, nmddata.com.au and realestatedealsaustralia.com.au.

Frequently Asked Questions

What do banks do with repossessed houses?

The core business of banks is providing finance, not trading in property. Once a bank has repossessed property due to non-payment of the mortgage, its goal is to liquidate the asset in a timely and economical manner. Once a court has provided the bank with possession of a property, it will generally assign a real estate agent to conduct the sale. Disposal of the house may entail the form of a private treaty sale, but more often occurs via auction because this method of sale is regarded as more transparent.

How do I find bank-owned properties in my area?

If you want to find bank-owned properties in your area, a first step is to get to know local real estate agents and/or buyer’s agents. Try to build a relationship where they will let you know about bank-owned sales before they hit the market. Several websites also specialise in repossessed homes for sale – try an area search at one of those sites.

Can you buy a foreclosed home directly from the bank?

It’s not usually possible to buy a bank-possessed home directly from the bank. However, in some cases, savvy investors contact distressed mortgagor just prior to the bank seizing control of a property and negotiate with the bank to achieve what is called a ‘short sale’. This is where the lender agrees to sell for a price less than the full amount owed because they realise that the debt and the costs associated with the repossession and mortgagee-sale process may not be covered by the eventual price achieved at auction.

Why are repossessed houses cheaper?

In some cases, repossessed homes can be bought for 15 per cent or more below their true market value. Reasons for the lower price include: the poor condition of the home when it is brought to market; the vendor placing the home on the market at a less than optimal time in the property cycle to achieve a quick sale; and ordinary buyers being wary of buying distressed properties. However, repossessed houses are not always cheaper. Some can attract an enormous amount of attention from bargain hunters, driving up prices. It’s also important to note that the law prohibits the lender from ‘underselling’ the property for a low price just to recoup something as quickly as possible.

Do you get money back if your house is repossessed?

If the final sale price is greater than the amount owned by the mortgagor minus the sales and legal costs, then the extra funds should be returned by the mortgagee. However, in many cases the costs associated with the sale mean very little money comes back to the mortgagor.

How can I stop my home being repossessed?

You may be able to stop your home being repossessed by making a payment arrangement agreement with the lender – or by persuading the ombudsman’s office (AFCA) to mandate a hardship variation. However, once the lender files a Statement of Claim for Possession with the court, preventing your home being possessed becomes very unlikely.


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DOMINIQUE GRUBISA
Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.


This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.


This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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