What is a mortgagee-in-possession sale?

Dominique Grubisa
Dominique Grubisa

Published 12:12 am 13 Jan 2021

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Many investors view mortgagee-in-possession sales as a golden opportunity to add a property to their portfolio at a price below its true market value. 

In simple terms, a mortgagee-in-possession sale comes about when a mortgage holder has repeatedly failed over an extended period to make repayments on their loan. The mortgagee (typically a bank) has then taken legal action, gained possession of the property, and is selling it in order to recoup the amount owing on the loan, missed interest payments and other costs.

Unlike a typical homeowner or investor putting a property on the market, a bank or other financial institution is not interested in gaining the absolute best possible price for the property, or even necessarily in maintaining it in good condition during the sales campaign. The lender simply wants a quick sale that covers the amount owing plus any additional costs. Such mortgagee-in-possession sales therefore may result in a sale price below the property’s true market value. 

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Experts predict that mortgagee-in-possession property sales are likely to increase in Australia in 2021 as the coronavirus pandemic continues to impact the economy. With banks pulling back on mortgage moratoriums, JobKeeper payments phasing out by the end of March and JobSeeker payments reducing back to pre-pandemic levels, significant numbers of Australians are likely to fall into financial hardship and increase the instance of forced sales, including mortgagee-in-possession sales. 

What is a power of sale?

Mortgage agreements in Australia typically contain what is known as a ‘power of sale’ clause. This is a loan condition that allows the mortgagee (lender) to sell the mortgaged property in satisfaction of the debt owed if the mortgagor defaults on agreed repayments. This will generally occur in the event of a series of defaults on a loan by a mortgagor (generally four months or more), although the mortgagee may reserve the right to exercise its power of sale following only a single breach of contractual obligations.

A lender will generally ask the defaulting mortgagor to hand over the keys to his or her property and vacate the premises voluntarily before proceeding with legal action to enforce the power of sale and take possession of the property. 

Once in possession of the property, the mortgagee holds all power in making decisions associated with selling the property, including whether it should be by auction or private sale, the order in which properties will be sold if a number of properties are involved, and the way in which properties should be marketed.                                                           

What are the obligations of the mortgagee-in-possession when selling a foreclosed property?

A power of sale does not mean that a mortgagee can sell the property for a low price and then pursue a mortgagor for the remaining amount owing. In Australia, the mortgagee is obligated to take reasonable care to ensure that the property is sold for market value or, if this is not attainable, for the best price reasonably available. These obligations, however, are open to interpretation and can be affected by overall market conditions. A mortgagee failing to meet this duty-of-care can be sued for any loss incurred by the mortgagor, so financial institutions are mindful that they cannot sell foreclosed properties for a song even if a very low sale price will fully cover the debt owed.    

There is no statutory duty or common law duty that requires the mortgagee to sell the property at the ‘best time’ or a time that is most advantageous for the mortgagor. The mortgagee is not obliged to sell the property at a time that is convenient for the mortgagor or when the market is buoyant, and the mortgagor cannot insist that the mortgagee delay the sale, or postpone a sale, and wait for a more appropriate time or a rise in market values.     

What are tenants’ rights in the case of a mortgagee-in-possession sale?

In the case of a landlord defaulting on mortgage repayments and the bank taking possession of the property, depending on circumstances, the mortgagee may make a demand for rent to the tenants under the Real Property Act 1900 or may demand possession of the premises, but cannot force tenants to leave without a court order and must give tenants at least 30 days written notice before eviction takes place. 

If tenants are occupying the property during the sale period, the mortgagee must negotiate with them for dates and times to show the premises to prospective buyers.

What is the real estate agent’s role in a mortgagee-in-possession sale?

Mortgagee sales are generally conducted via auction. Prior to the auction, the mortgagee will engage a property valuer to give an up-to-date valuation of the property and a real estate agent to be its representative during the marketing process. The mortgagee and their chosen agent are unable to disclose information about the mortgagor, the valuation amount or the amount they are expecting the property to sell for. 

How to find mortgagee-in-possession properties for sale in Australia.

Your best source of information on upcoming mortgagee auctions in the area you are looking to invest in is local real estate agents. Get to know them and ask them to alert you if they hear of any impending mortgagee-in-possession sales. 

How does a mortgagee take possession of a property?

If a mortgagor is in default of their home loan agreement and has missed several agreed monthly repayments, the mortgagee will first send letters demanding payment of the arrears by a certain date or the entire remaining loan will become due and payable. If the mortgagor is unable to raise the arrears amount in time, and their financial situation is unlikely to improve any time soon, they may choose to hand over the keys to their property to the bank and vacate the premises or may be able to negotiate with the bank to put the property on the market themselves in order to clear their debt. In the latter case, this is referred to as a “distressed sale”, 

If the mortgagor does not take either of these steps, the mortgagee will proceed with legal action and obtain court orders for the mortgagor’s eviction from the property and subsequent possession of the property by the mortgagee. The mortgagee-in-possession can then sell the property in order to recover all monies owing. Any sum gained from the sale over and above the amount owing to the mortgagee plus costs incurred goes to the mortgagor. 

Frequently Asked Questions

What does repossession of property mean?

If a mortgagor is in default of their home loan repayments, the mortgagee can obtain a court order to send a sheriff to evict the occupants of the property that is the security on the loan, clear out all their possessions and take possession of the property in order to sell it and recover all debts and costs incurred.

Does a mortgagee own the property?

A mortgage is a type of loan where real estate is used as collateral. The property is owned by the borrower and the borrower’s name is on the Certificate of Title. However, the lender holds the Certificate of Title as security and the lender’s interest will be registered on the certificate until the mortgage is fully paid off. If the borrower defaults on the loan, the lender may take steps to recoup the money it is owed through the sale of the property. However, it is rare for a lender to have ownership transferred to it before the sale.

How long does it take to repossess a house?

Once a borrower has missed payments for 90 days, lenders typically issue a notice of default. If payment is not made after a further 60 days, lenders will then send a S88 Notice which advises the borrower they have 30 days to pay the overdue loan. The S88 notice expires six weeks after it is issued, and legal proceedings are then typically initiated by the lender. The exact length of time repossession takes will depend on the speed of court proceedings plus any appeals or negotiations initiated by the borrower.

Can a mortgagee in possession grant a lease?

Depending on conditions in the mortgage and the state of Australia in which the property is located, it may be possible for the mortgagee to grant a lease on a repossessed property. In NSW, for example, the Registrar General’s Guidelines state that a mortgagee in possession may grant a lease pursuant to express or implied powers under the mortgage or s106 Conveyancing Act 1919.

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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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