Everything you need to know about foreclosed properties
Published 7:24 pm 6 Jan 2021
We Australians tend to watch so much American television that we sometimes become confused between their institutions and laws and our own. An Australian might talk about ‘ringing 911’ when they in fact mean ‘ringing 000’. Or we might expect someone to be ‘read their rights’ when they are arrested, even though that practice doesn’t exist in our country.
And this language confusion also extends to the world of distressed property. Australians looking for real estate bargains often talk about ‘foreclosed properties’ or ‘foreclosure properties’ when they generally mean ‘mortgagee-in-possession properties’. While the practice of foreclosure is the common route for repossessed sales in the US, we Australians use it far less often. In fact, when a lender foreclosed on a property in Queensland in 2018, it actually made news in legal circles!
That said, the word ‘foreclosure’ is used so much in Australian property circles that it has effectively taken on a new, commonly understood meaning. We now typically understand that a foreclosed home is one where the lender has re-assumed possession due to non-payment of the mortgage and is now undertaking a forced sale. In such instances, there may be real bargains to be had for property investors and first-home buyers alike. ‘Foreclosed properties’ are often sold in a distressed, as-is condition, with visible faults and flaws. As such, sale prices can be 10 to 40 per cent below market value.
What are foreclosed properties?
When a home buyer takes out a mortgage with a bank, the property at the centre of the agreement is regarded as collateral. Should the buyer (the mortgagor) fail to make the agreed payments over an extended period of time, the lender (the mortgagee) is entitled to gain control of the property and sell it to recoup the money it provided as a loan, plus other expenses.
In the United States and in some rare cases in Australia, the repossession process involves the property’s title being legally transferred from the mortgagor to the mortgagee. The lender then sells the property to recover its money.
Far more commonly in Australia, a simpler process takes place during repossession. The borrower’s name remains on the title of the property, meaning they are still the legal owner. However, the lender assumes legal control over the property and is able to conduct a so-called ‘mortgagee-in-possession’ sale to recover its money. This approach is cheaper and simpler for a lender.
However, language is constantly evolving. When a property investor googles the words ‘foreclosure properties’ or ‘foreclosed properties’ they are typically looking for all forms of bank-possessed property. Meanwhile, many of the websites that have sprung up to connect consumers with distressed properties also use the term ‘foreclosed properties’ to refer to mortgagee-in-possession, repossessed properties.
For this reason, the rest of this article uses the terms ‘foreclosed property sale’ and ‘mortgagee in possession sale’ interchangeably. Both terms refer to distressed sales where the lender is selling because of non-payment by the mortgagor.
There are a range of reasons why non-payment occurs, including the mortgage holder losing their job, going through a divorce or suffering from illness or disability. They might have suffered a death in the family, have fallen victim to predatory lending, or be unable to cope with either higher interest rates or making the switch from interest-only to principle-and-interest loan repayments.
Foreclosure on rental properties
Foreclosure on a rental property occurs when a landlord has been unable to meet the repayments on an investment property that they are renting out, and the lender has seized control. Even if the tenants have a lease and have always paid their rent on time, it’s likely they will be required to leave. If they ignore a 30-day notice to vacate, they can be forcibly evicted by the Sheriff.
Would-be buyers should be aware that there can be cases where tenants dig their heels in and refuse to leave. They may damage the property or refuse to maintain it. You will want the contact of sale to stipulate and guarantee vacant possession, with all goods and chattels in good condition, if possible
Foreclosure on commercial properties
Despite the COVID-19 pandemic and waves of shutdowns across the country, the number of distressed sales of commercial properties has been relatively static. Experts suggest that this might be due to banks refraining from foreclosures because of cheap funding (ultra-low interest rates) from the Reserve Bank. That mean banks have been supportive of small-to-medium-sized businesses. Another sweetener in the mix has been the Federal Government’s moratorium on insolvent trading laws.
Foreclosure at auctions
The majority of foreclosed and mortgagee-in-possession sales are conducted via auction. Most such sales make the real estate listings with market-value pricing as the bank will be keen to achieve the highest possible price. However, the stigma of the repossession, the condition of the property and the timing of the sale can all contribute to a final sale price that is below true market value.
The sales contracts will be different from properties bought through private treaty. Foreclosure auctions won’t necessarily give you the option to add conditions such as ‘subject to obtaining financing’ or the sale of another property you own. You may have to cough up the cash quickly as the vendor may not wait for you to organise finance. And if the property is in disrepair, a lender may baulk at offering you a loan to buy it.
Pre-foreclosure properties represent a sweet spot for investors seeking good-value distressed properties. The term refers to properties where the mortgagor is in distress and having trouble making payments, and yet the lender has not yet seized control and begun proceedings to sell the property. A pre-foreclosure property could be yours for between 10 and 40 per cent under the current market value. But you’ll need solid people skills and negotiation skills. You’ll have less competition with other would-be buyers because they’re more likely to buy at the public auction stage.
Pre-foreclosure property sales see you negotiate directly with the owner, not the lender or a lawyer. Time may be on your side to create a favourable deal for you, too. You could agree to buy the property, or alternatively you could take over the loan obligations in a joint-venture style arrangement with the owner.
Risks involved in foreclosed properties
While it might sound like the foreclosed properties offer a bargain for those with cash at hand, there are risks. For starters, many ‘newbies’ to property investment look for these types of properties, assuming foreclosure equals cheap property. Here are risks in buying a foreclosure property:
- You may not always be able to inspect the property before the sale;
- You may be battling multiple bids from other parties;
- You may be tempted to pay over the property’s market value due to the competition;
- You may make an incorrect estimate of the property’s real value;
- You may not be certain that the vendor’s agent had submitted your bids;
- You may have to deal with a caveat on the title placed by someone else apart from the bank. That means their debt must be paid before you can settle on the property;
- You may have to deal with a disgruntled property owner or tenant sabotaging the property, its goods and chattels which may not be guaranteed in the sale;
- There may be problems with equipment or goods on hire left within the property. You won’t own them and the hirer will need to repossess them;
- You might sign a sales contract that benefits the vendor more than you. Check for addendums that reduce or remove their liability for issues with certified building works, goods and chattels even vacant possession of the property on settlement. The ball’s in the bank’s court when it comes to foreclosed properties, so often there’s no wriggle room on the contract’s terms and conditions.
How to locate foreclosure properties in major cities
You have a range of options for tracking down foreclosed properties including:
- Popular websites including domain.com.au, realestate.com.au, realestatedealsaustralia.com.au, forcedsale.com.au, properties.mitula.com.au, australia.trovit.com, and wholesaleproperties.com.au;
- Real-estate for-sale signs in your target area;
- A professional buyer’s agent;
- People in your network (or your target region) who may be in financial distress and you think maybe open to a discussion;
- Court case listings.
Foreclosure and taxes
Foreclosure often takes place when the homeowners involved has accrued sizeable debts through factors such as:
- Property taxes;
- Personal income taxes;
- Unpaid child maintenances as per an agreement;
- Court judgement against the homeowner where they have to pay fines/costs;
- Local council rates and charges;
- Land tax bills.
Beware of unpaid debts or tax liens filed on distressed properties. If your property has one of these, it will delay the sales traction. The process is that the tax lien is applied first, then the property goes to foreclosure. You can find out more about Australian property taxes at business.gov.au.
Is it smart to buy a foreclosed home?
Foreclosed property can be a great investment, provided you do your homework, are satisfied there is a profit to be made, and buy wisely. When weighing up the pro and cons, consider factors such as what the market wants, the amount of work required to bring the property up to the point of resale, the needs of the market, and your ability to handle blow-outs and other risks.
Do banks want to foreclose?
The primary business of banks is providing finance, not investing in property. They make money by providing mortgages that extend over decades and then reaping the interest that mortgagors accrue. Taking possession of a property is generally the last thing they want to do. Before going down the path of foreclosure, banks will generally have had extended discussions and negotiations with the property owner. However, once they decide to repossess and sell a property, banks tend to do everything they can to get their money back.
Why are so many homes in foreclosure?
The coronavirus pandemic has led to unemployment and economic uncertainty across Australia and the result has been increasing numbers of people missing mortgage payments. About a third of Australians receiving the JobKeeper payment used it for mortgage or rent payments. Meanwhile, about 20 per cent of Australian mortgage holders are at risk of ‘mortgage stress’, according to research firm Roy Morgan.
Do foreclosures bring down property values?
It’s a numbers game. In a neighbourhood with many foreclosure sales, and all of them sold under market value, yes, that collectively would bring down the median property price. That impact assumes property prices elsewhere in that area haven’t increased to balance out the lower prices. So, a swathe of foreclosures can lower property prices in the surrounding area.
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