The Inside Oil on Mortgagee Sales
Mortgagee sales are part and parcel of the property market, but these property sales are surrounded by special characteristics differentiated from the usual property sale and purchase most of us are familiar with, and which are useful to know.
Who is a mortgagee and what is a mortgagee sale? A lender, such as a bank, is a ‘mortgagee’. A lender provides the loan to buy the property, and secures the debt by registering a mortgage on the property title. If a borrower defaults on repayment of the loan then after a certain period of time the lender is entitled to take legal steps to sell the property to recover the money owed. This is called a ‘mortgagee sale’ which simply means ‘sale by secured lender’.
Is a borrower still liable for the debt even after the sale? It is very important to understand that where a lender sells a property, and there is still a shortfall following payment of the lender’s legal and other costs of sale, the borrower and any guarantor will still be liable to the lender for the shortfall. And, believe it, the lender will likely pursue any shortfall through the courts as a judgment debt and, ultimately, potentially bankruptcy proceedings. Note that a lender is not obliged to hold out for the highest market price at all costs, but must take reasonable steps to obtain the best price at the time. Typically though, it has been reported that mortgagee sales generally achieve a lower market price than an ordinary property sale because of various risks involved to the purchaser.
What are the risks of buying at mortgagee sale? Unlike a standard property contract most people usually come across, a mortgagee lender basically doesn’t guarantee anything other than being clear of its mortgage. Under a mortgagee sale contract, a lender usually specifically contracts out of a number of standard procedures and obligations you might find in an ordinary property contract. For example, access to view the property prior to the sale, vacant possession on settlement (sometimes a home owner remains in the property even after sale), any matters concerning the title such as easements etc, any obligations regarding building matters/permits/consents or lack thereof, keys to locks at the property, rubbish removal/cleanliness/lawns mowed etc, any internal or external damage/repairs/maintenance, chattels are usually not warranted or included in any sale (such as carpet, curtains, stove, dishwasher, heating, and any other fixtures or fittings and so on). Also, a mortgagee sale agreement does not usually have any of the usual property contract due diligence provisions such as being conditional on finance approval, checking the council property file, obtaining a building report or Land Information Memorandum. So, in essence, there is some risk when buying at mortgagee sale.
It is recommend that if you are looking at buying a property in a mortgagee sale, it is very important that you do your homework first. Always, always, have a conveyancing or property lawyer review the contract, title, and any supporting sale documents before signing anything or bidding at an auction. Importantly, once the contract is signed it is binding and there is usually virtually no way of escaping out of the contract if you are a buyer.