K3 Legal's Ruby Yi outlines the traps buyers need to be aware of behind the good opportunity
Mortgagee sales can be scary, as they often come with very limited vendor warranties and information. The price can appear attractive because generally only sophisticated purchasers are interested – the sophisticated nature of the purchase generally means that a buyer is not paying a premium for the property.
Yi describes mortgagee sales as sales transactions that arise from a “mortgagee exercising their right to sell a property pursuant to a registered mortgage they hold over the title of that property.” Mortgagee sales usually arise from a loan not repaid on time or the borrower ceasing to pay either during the term of the loan or at the end; the entity or person lending the monies is called the “mortgagee,” while the entity or person borrowing the monies is called the “mortgagor.”
In a typical scenario involving a mortgagee sale, a bank loans money to a borrower based on the borrower granting a mortgage over the borrower’s property to the bank. If the borrower stops meeting their mortgage repayment obligations, the mortgage gives the bank a legal right to claim the property in which it has a security interest. If the parties cannot agree on alternative mortgage repayment arrangements in this instance, the bank may choose to exercise its legal right to claim the property as a mortgagee and sell it to repay the monies the bank is owed.
The seller’s advantages
In facilitating a mortgagee sale, the mortgagee owes several legal duties to the mortgagor and will therefore take a number of steps to protect itself from the potential liability that may arise from the sale.
Firstly, the mortgagee as the vendor will ensure they will not be liable for any of the usual vendor’s warranties under agreements for sale and purchase of properties by deleting or amending most (if not all) of the vendor warranty clauses. Yi outlines some common effects of amended vendor warranties:
- the vendor does not guarantee the existence of necessary permits such as building consents, local authority consents or code compliance certificates
- chattels are not normally included in the sale, as these are not covered by the mortgage. The chattels may be secured by other lenders or retail shops, and should be reviewed by a buyer
- the purchaser is typically contractually bound to rely solely on their personal judgment and enquiries in entering into the agreement
- the vendor is not obliged to disclose any details of any lease, tenancy, licence or other occupation arrangement for the property
- the vendor does not guarantee vacant possession on settlement
If problems arise, the buyer may not be able to claim compensation against the vendor as under the usual agreements in the sale and purchase of properties. For example, if the buyer finds that the property is still occupied on settlement, it is their responsibility to evict the occupier at their own cost and not the vendor’s.
Secondly, the mortgagee as the vendor will usually reserve the right to cancel the agreement any time before settlement.
“The cancellation could be as a result of intervening events such as court proceedings, outstanding requirements, objections, demands, requisitions, or it could be because the mortgagor had repaid the mortgage in full,” Yi says. “Whatever the reason, the mortgagee as the vendor, usually has a broad discretion to cancel the agreement prior to settlement which means potentially wasted money, time, energy, up to that point go to waste – without a claim to compensation.”
Thirdly, mortgagees as vendors often unload the sales on an “as is where is” basis, requiring a buyer to accept the property the way it is on settlement. A property may not be in the normal state of repair at this stage due to a defaulting borrower who has “checked out” in relation to the property, and if the property is found to be untenantable upon settlement, the buyer may not be able sue the vendor for compensation.
Finally, the mortgagee as the vendor owes a legal obligation to its mortgagor and any subsequent charge holders to obtain the best price reasonably obtainable for the property at the time of sale.
“This means that the mortgagee must take reasonable steps in selling the property which may include marketing the property through recognised real estate agencies and conducting the sale through appropriate means such as a public auction or tender,” Yi says. “With the appropriate marketing attracting potential buyers and the number of potential costs and pitfalls associated with a mortgagee sale, you may not be the only one hunting a bargain after all.”
How buyers can protect themselves
Before making an offer on a property being unloaded in a mortgagee sale, Yi recommends that buyers all seek legal advice first from lawyers who have dealt with mortgagee sales.
“A qualified solicitor should review the title and the agreement before you sign up for anything,” she says. “If chattels are included in the agreement, a lawyer needs to check that it is unencumbered.”
In addition, Yi suggests that buyers order the following reports:
- a Land Information Memorandum report
- a valuation report
- a builder’s report (if you are granted access to the property)
- a property file from the local council to ensure that the property has obtained the required building consents and/or a code compliance certificate.
“Get insurance on the property from the day you win the auction and tell your insurer that the property is from a mortgagee sale,” she says. “If you are purchasing with a loan, check that your bank approves before you offer to buy.”
Finally, after settlement the buyer should change the locks on taking possession of their new purchase – asserting their ownership of the property.
“More than ever make sure you get on and inspect the property so you know what you are buying. Get as much information as you can,” Yi says.