A mortgagee sale sounds like a bargain, which is very appealing at a time when most houses for sale are prohibitively expensive. It is necessary to buy with your eyes open, however, as they can sometimes be more costly in the long run if problems arise.
What exactly is a mortgagee sale?
When a house is bought with the help of a loan from a bank or other financial institution, the house is actually security against that loan. If the homeowner cannot meet their obligations, which usually means they are unable to repay the mortgage, the lender is allowed to sell the house to get their money back, often by auction or tender. The mortgagee only needs to recoup the money owing to them, so the price can be lower than for similar homes on the market, although the seller is supposed to obtain the best price that is possible at the time.
What are the risks?
Unfortunately there are many potential issues to look out for with a mortgagee sale. Basically the terms and conditions are different to those of a regular sale. The risk associated with the property is passed to the buyer at the time of the sale, before the final settlement. Any damage or problems are therefore the new owner’s responsibility. The seller cannot guarantee vacant possession, so the new buyer has to face the risk that the person living in the house will be unhappy with the sale and will either not move out in time, or actually refuse to vacate the premises at all. Clear title may not be guaranteed, so it is possible that the seller is not the only one with finances invested in the property. Money could still be owed on it to secondary lenders. Chattels are usually mentioned in sale and purchase agreement documents, but this is not usually the case with mortgagee sales. Items like carpets, window coverings, stove, kitchen fittings and lights may be gone by the time the buyer moves in. The seller is not required to disclose information about building permits, boundaries or codes of compliance, so future issues can occur if the house is not safe or additions have been built without consent. The new owner might also find themselves liable for outstanding rates, body corporate fees or other payments.
What should you do?
If you want to try your luck with a mortgagee sale, you should ask for legal advice to minimise risk and understand the situation fully. It is vital that you get your hands on a copy of the sale and purchase agreement so that you know exactly what you are buying and what the conditions are. If you need a loan to purchase the property, you need to tell the bank that it is a mortgagee sale. The insurance company you use should also be informed of the fact so that you can be properly covered for potential theft and damage in the event of problems.