*This story first appeared in our Property360 digital magazine
Experts say there are bargains to be had when considering purchasing a house that has been repossessed by a bank, but warn of risks in this form of property acquisition
While buying conditions are great for those who can afford to make an offer on their first or even second home, many home owners are struggling to meet their bond repayments in a difficult economic climate.
Banks maintain that home repossessions are always a last resort, but this is nevertheless a reality for many distressed home owners.
And of course the sale of distressed properties can offer buyers great value for money. There are, however, also risks to bear in mind, so buyers looking to snap up these properties need to know what they are doing.
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When approaching the distressed property market, says Tony Clarke, managing director for the Rawson Property Group, it is important to understand the three basic types of sales that fall into this category. There are the the “bank-mandated sales”, “sales in execution”, and “properties in possession”.
Each has its own processes that can affect the price and potential value of the property for sale.
The process
He says bank-mandated property sales are usually a voluntary step taken by mortgage-holders to resolve a situation when their bond repayments have fallen irrevocably into arrears.
“The mortgage-holder gives the bank a mandate to sell the property on their behalf in order to settle their debt, and the bank is then responsible for hiring a real estate agent to market and facilitate the sale.”
If the property doesn’t sell, or the owner refuses to accept any offers in spite of their debt, the bank will then proceed with legal action. The bank must obtain a judgment from the High Court against the defaulter, after which the property can be attached and sold by the sheriff at a sale in execution auction.
If a property doesn’t reach its minimum reserve price on auction, Clarke says it is bought back by the bank and becomes a “property in possession”, also known as a bank repossessed property.
Where to find repossessed properties for sale
Sales in execution are advertised in the Government Gazette, says Tiffany Singh, head of collections at FNB Home Finance. The respective sheriffs also have lists of these upcoming sales which prospective purchasers can view.
“However, once a property is bought in (repossessed) by FNB at a sale in execution, the properties are marketed via My Roof and various estate agents.”
Absa has bank-listed properties available on its website for customers to browse, says Geoffrey Lee, the bank’s home loans managing executive. Its repossessed properties can also be found on online property portals under “bank sales”, where buyers can express their interest by completing a lead form.
Benefits of buying a distressed property
Buyers of repossessed homes do not pay transfer duty as the selling bank absorbs that expense, Lee says. But this does not necessarily mean that the property will be sold for less than if buying directly from the previous owner.
“Both the bank and the previous owner attempt all avenues to sell the property at market value or the highest possible selling price.”
Singh says the bank also pays the municipal accounts and levies (if applicable) so generally all those accounts are up to date. Buyers can apply for financing from the same bank, which makes it “less stressful”. Again, this does not necessarily mean buyers will get the property for less than if buying from the seller directly.
“It depends on the circumstances. For example, the condition of the property (good or vandalised) and whether it’s illegally occupied or vacant, will impact the amount that a buyer will offer on the property. A seller in financial distress might also have unrealistic expectations of the property value and this is an important factor, to bear in mind.”
Risks of buying a distressed property
Possible negatives include the fact that properties may be in poor condition or vandalised, Singh says. Buyers will then have to spend money to repair and improve them.
“A property may also be illegally occupied which means that the buyer has to evict the occupants and this is time-consuming and costly.”
In addition, Clarke says repossessed properties have normally been on the market at least once before (on auction) without selling, and buyers should be aware that there may be good reason for this.
“It’s not always the case, but repossessed properties are often fixer-uppers. If a mortgage-holder can’t afford his or her repayments, it’s unlikely that they are going to have had much money to spend on upkeep and property improvements.”
Also, the property could still be occupied by the previous owner or tenants, Lee says, and so a potential buyer may not be able to view the property and ascertain its conditions before purchasing.
“Repossessed properties are sold ‘voetstoots’ so the purchaser takes ownership and accepts responsibility for the property condition as is, and will be responsible for any repairs or maintenance.”
Pricing
Bank-mandated property sales, Clarke says, tend to be listed at fairly realistic market-related prices, and therefore offer less value to bargain-hunters when compared to other types of distressed sales. Echoing this, Lee says Absa always tries to secure the highest possible selling price so that once the outstanding amount is settled, the owner can at least be paid the balance of the proceeds. The bank takes into consideration the condition of the property and municipal bills when agreeing on a fair purchase price.
“In the event that there is a shortfall after the sale of the property, we are prepared to grant concessions or rebates to allow the customer to extricate themselves from the debt. The bank will always try to support customers in troubled times. This assistance is dependent on our customers’ willingness and receptiveness to engage and accept the alternative options by working with us to reach a mutually sustainable solution.”
Properties sold at auction, however, have a minimum reserve price which is often far less than the market value of the property, Clarke adds.
“The reason for this is that the main purpose of the sale is not to achieve a good price, but rather to recover the outstanding debt owed to bank by the mortgage-holder and any associated legal costs as quickly as possible.”
Wise advice
Singh suggests buyers check the price range they are approved for so they know what they can afford. It’s also important to view the property and ascertain its condition, and check if it is occupied.
Lee adds: “A purchaser should also consider the purpose for which they are purchasing a repossessed property, such as whether it will be used as a rental property. In that way if the property is already occupied they may be able to negotiate rent from the current occupants and eliminate the costs of eviction.”
When buying at auction, Clarke advises buyers to read the fine print on the conditions of sale very carefully, as the purchaser can sometimes be held responsible for any outstanding rates, levies and taxes on the property, as well as the eviction of any tenants, or the previous owners, if necessary.