Buying At a Mortgagee Sale? What You Need To Know

15 January, 2013 | Wade Hansen

One of the outcomes of the global financial crises and the effect that it has had on our economy is the increase in mortgagee sales. A mortgagee sale is usually a bank calling up their loans and exercising their rights to sell the property pursuant to their registered mortgage over the property. Whilst this means that the properties are sometimes sold below market value, there are a number of risks associated with purchasing a property at a mortgagee sale.

Due Diligence

Mortgagees (i.e. the bank) will invariably remove most of the warranties (promises) from the sale and purchase agreement, resulting in you buying the property “as is, where is”. It is therefore important that you undertake a pre-purchase due diligence investigation (refer to due diligence article) including:

• Obtaining a LIM;
• Ensuring the property has a code compliance certificate;
• Obtaining a Building Inspection Report;
• Securing finance to purchase the property;
• Perhaps obtaining a valuation for the property; and
• Searching the title.

Insurance

The risk in the property usually passes to you as the purchaser “from the fall of the hammer”. Insurance companies may not be willing to provide cover and you will need to ascertain this before you make an offer or bid at the auction. Further, you will need to check if the insurance company will also cover the chattels in the property as such chattels may not be caught under the mortgagee’s security.

Vacant possession

The mortgagee normally does not promise that the property will be provided with vacant possession. Whilst there are remedies available to you as purchaser in order to remove the occupier following settlement, this can prove costly and stressful. Therefore you need to check if there will be any issues with vacant possession and if so, be prepared to take such necessary steps to remove the occupier.

Other typical conditions

Other typical conditions contained in mortgagee agreements are:

Whilst the mortgagor (i.e. the owner) has the ability of paying back the mortgage up to the 11th hour, there are sometimes provisions in the agreement whereby the mortgagee (the bank) can cancel the agreement at any time prior to settlement. Even though your deposit will invariably be repaid, this can result in disappointment. It can also be costly due if you have undertaken a due diligence investigation of the property or made arrangements to move.

In addition to the removal of the warranties, there will be exclusion clauses whereby the mortgagee will exclude liability for a number of issues including such things as leaky building or Council requirement issues.

There will more than likely be arrears with outgoings (e.g. rates). Therefore it is important that you ascertain whether of not you will be liable for such amounts on top of the purchase price. In the event that you are acquiring a unit title, the mortgagee may attempt to exclude their requirements to pay the arrears meaning that you may be required to pay the overdue body corporate fees etc.

Settlement date

In order to protect your investment, you may be able to bring the settlement date forward in order to settle as soon as possible after you have entered into the agreement.

As you will see, the mortgagee sale extends beyond you entering into an unconditional agreement and it is important that you understand exactly what you are getting yourself into. Therefore it is imperative that you consult us prior to signing the agreement so that we can identify and explain to you the relevant pitfalls associated with mortgagee sales.

If you have any questions regarding the above, or wish to seek advice regarding buying residential property, please contact the author and head of our Property Team, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz