The pros and cons of mortgagee sales

Wednesday, 7 November 2018

People will have to make their decision on buying the home based on photos as the owner will not allow access to the property.

A mortgagee sale 'gone septic' has left a Whangarei real estate agent stuck with trying to sell a house nobody can go in and view.

A mortgagee sale is one instigated by a bank or lender owed money on a property, when the loan is no longer being serviced.

Mortgagee sales are usually seen as the last resorts for banks and real estate agents because they are often sell at a lower price to recover debt owed to the bank.

But unresponsive property owners can drive the property price down further, making the process that much harder, Eves real estate agent Karl Leathley said.

'Nobody really wins with a mortgagee sale,' Leathley says.

* The house you have to buy without knowing what's inside

* Personal nightmare of mortgagee sales**

He is having to sell the 1960s weatherboard property from the road, relying on just photos of the house.

When does a mortgagee sale happen?

Loan Market mortgage adviser Karen Tatterson says banks proceed with a mortgagee sale when property owners become unresponsive regarding their debt repayments.

'Banks understand they have a moral and legal obligation to help as much as they can resolve the issue but if the owner buries their head in the sand and doesn't respond, that's when they hand out a notice,' Tatterson says.

What rights does the owner have?

The bank has to give the owner at least four weeks' notice about any concerns it has with the repayment of the loan.

A mortgage sale happens when the bank, or mortgagee, steps in and forcibly sells a house when the owner can't pay back the debt.

It must also give a date by which the problem needs to be resolved and inform the owner what actions the bank might take, such as selling the property.

Leathley said it paid to communicate with the bank if the owner was struggling to make the mortgage payments.

'Many times people don't know they can sell the property before going through the mortgagee sale. [Mortgagee sales] are a bad look for banks too so its good to keep open communication to figure out ways to prevent it.'

He said the bank could give the owner the opportunity to sell the house before instructing a mortgagee sale.

Can the owner decide to sell the property after the bank decides on a mortgagee sale?

Leathley said, in some cases, the property could end up being sold by two different real estate agencies.

'Technically when you take a loan from the bank they are also an owner so in some rare cases a property may have two real estate companies.

'After it gets to becoming a mortgagee sale the owner might decide they want to sell it for a higher price so there are two competing agents trying to sell the property.'

What happens if the house is being rented out?

Real estate agent Karl Leathley says mortgagee sales are last resorts.

The bank has to inform the tenant when it takes over as a landlord and will be collecting rent.

Once the bank has possession, it has the same rights and responsibilities as if it were the landlord and is bound by the Residential Tenancies Act 1986.

In the case of a fixed-term tenancy, the mortgagee or the new owner has the right to give notice to end the tenancy.

According to the Ministry of Business, Innovation and Employment, this applies unless, for example, the mortgagee bound themselves at the beginning of the tenancy that the fixed term would continue even if they took back possession through the mortgagee sale process.

When the bank takes over, or the house is sold at mortgagee auction, the tenant also has the right to give notice to end the fixed-term tenancy.

What are the risks and rewards of buying a mortgagee sale?

Buyers do face extra risk when buying at mortgagee sale, so prices are usually lower than for houses that are not subject to a forced sale.

In strong property markets like Auckland, there are very few mortgagee sales.

The risk and reward of buying through a mortgagee sale. Video first published in 2018.

Usually, banks give people who have failed on their mortgage payments time to sell their homes themselves to avoid the stigma of a mortgagee sale.

In some cases, the owner is being forced to sell against their will and puts up a fight.

Prospective buyers might be faced with having to move an unwilling occupant out before they can shift in. There is no guarantee that the house will be empty on the day you take possession and you might have to get a court order to do so.

You also cannot check what condition it is in before the sale settles - and you could find the former owner causes serious damage on their way out.

It's also common to find that lots of the normal chattels - curtains, light fittings and so - that you would normally expect to find in a house have been removed.

For the old owner, there are some legal protections in a mortgagee sale, chiefly that the sale must be properly conducted and the seller must attempt to seek a market price.