The Pitfalls of Buying at a Mortgagee Sale.

Mortgagee sales have been in the news lately (this article originally dated August 2009 - the basic principles still apply), partly because of the increase in the number of homes that have sold this way, and partly because of the widely publicised experience of a couple who purchased a home this way, on Auckland’s North Shore. In pristine condition when purchased, by the time the couple came to move in the previous owners had trashed the home. All white-ware, curtains and carpet had been removed. So had many of the light fittings, a deck, and even some of the features of the external landscaping. But what surprised many people who heard of this was that the previous owners were acting within their rights in removing most of these items.

As at August, 3.5% of all New Zealand house sales in 2009 have been mortgagee sales. That may not seem a huge percentage, but only once in recent years (2001) did that figure get above 1.5%. Many people think buying a home at a mortgagee sale guarantees a bargain but there are pitfalls that many buyers don’t know about.

What is a mortgagee sale?

In basic terms, a mortgage is a loan taken out to buy a house. The house is used as security against that loan. That means, if you cannot repay the loan, the person or mortgagee (usually a bank) who loaned the money can sell the house to recoup their money. That is the first thing to remember; at a mortgagee sale it is not the home owner who is selling the property. The seller is whoever loaned the money to purchase that home and it is often sold against the owner’s wishes. This means there are a number of risks associated with the purchase.

The risks:

• While you will, after purchase, own the home, the seller does not guarantee vacant possession. It is your responsibility to get the previous owner to leave. That can sometimes be a problem as, in a much publicised court case, the purchaser of a commercial building in Kaikohe recently discovered when the previous tenants simply refused to vacate the premises.
• Chattels will not be included in the sale. While most sale and purchase agreements make mention of chattels, a mortgagee sale agreement does not. Hence, there is no guarantee that chattels will be left when the previous owner leaves. Chattels include; stove, curtains, carpet, light fittings, etc. Buyers need to ensure they know exactly what they are buying and what they are not buying.
• At the moment of sale, risk on the property passes to the purchaser. That means, any damage from that time on, even though settlement has not been finalised, is the purchaser’s responsibility. For this reason it is important, if a property is purchased at a mortgagee sale, to insure immediately (and the insurance company needs to know the details of the purchase).
• Clear title to the property is not always guaranteed. This can cause real problems. If the mortgagee selling the property is not the only lender the new purchasers may end up with a property that still has money owing on it. At some point the secondary lenders will want their money paid back also.
• Building permits and the like do not have to be disclosed by the mortgagee. Hence there is no guarantee that the building has been constructed with the necessary permits or consents, or is even safe. This can lead to issues later on if renovations or alterations are contemplated, or at the point of resale. It can also affect the ability to gain insurance on the property.
• Usually when a property is purchased outstanding rates, body corporate fees etc. are apportioned pro-rata between the previous owner and the new owner. A mortgagee seller does not always guarantee to do this. The new owner may be liable for all such fees that are outstanding.

What safeguards can a buyer take?

Most people do not know the pitfalls associated with buying at a mortgagee sale. The most important thing to remember is that it is vital to get a copy of the Sales and Purchase agreement and seek legal advice before purchasing. Your solicitor will be able to alert you to all the anomalies that you may face and give expert advice.

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Remember also, if borrowing money to purchase a property, you must disclose to the bank that it is a mortgagee sale. The FORTIfi Mortgage Team can liaise with all major banks and arrange all your mortgage needs - phone 0800 50 44 44 or click on this link and fill in the enquiry form.