Clearing up misconceptions about mortgagee sales
There are a number of long-held and misinformed ideas surrounding sales of property by mortgagees (lenders). Often parties are interested in pursuing a mortgagee sale in the hope of securing a “bargain”. Each time buyers attend open for inspections for a mortgagee repossessed property’s auction, the same main questions typically arise:
- Will it definitely sell at auction?
- What’s the debt against the property?
- Will the mortgagee accept an offer prior to auction?
To respond in order, the mortgagee (usually a bank or similar lender) is generally not in the business of holding real property – they are in the money business. They wish to realise the asset and recoup their outstanding funds. Having said that, the mortgagee has an obligation to act in good faith and have regards to the interests of the mortgagor (defaulting borrower). In the event that a property was “dumped” by a mortgagee at a price found to be significantly below a fair market value, there will be solid grounds for a claim for compensation by the borrower. There is no specific obligation upon the mortgagee governing the manner and form in which the subject property should be sold – however, every step that is taken towards a comprehensive, suitably structured marketing campaign results in a reduced likelihood of a successful mortgagor challenge in the future. As a rule of thumb, mortgagees commission an independent certified valuation of the property, and this becomes a very good guide in terms of a reserve. So, “Will it definitely sell at auction?” The answer is no.
Buyers will often query the level of debt encumbering the property. While this may impact the mortgagee’s bottom line for the year, it has no effect upon the actual market value of the property. A $1 million property repossessed over a $100,000 debt is not suddenly worth $100,000, and any mortgagee accepting a price like that should line up its lawyers in readiness for a courtroom fight. Similarly there are often cases, regularly involving fraud of some kind or ill-advised financial planning, where the debt is significantly higher than the market value of the property. As much as the mortgagee would very much like to see the value cover its debt, the property is valued on its own merits. If a mortgagee accepts a price less than the debt, it is required to see transfer of the property at settlement with clear title.
Pre-auction offers are a common issue. We return to mitigating legal exposure for the mortgagee. The courts consistently view a public auction as a fair test of the market – a sale prior to auction begs the question as to why an offer was accepted. The property is always for sale and offers welcome, however we regularly suggest that “unless your offer is to be so compelling that the mortgagee may be found culpable for not accepting it, we’ll proceed to auction”. It’s a rare day that someone wants to be “that buyer”. The courts have found that no advertising or auction is necessary at all should the price achieved be sufficiently “compelling” and responsible compared to an independent valuation. The practical application however is that public auction is most largely considered the optimal and fair way to assess buyer interest and thereupon it is best to leave the campaign to run all the way to the gavel.
Recently Kousal v Suncorp-Metway [2011] and the very widely publicised auction sale preceding this matter involved a sheriff auctioning a mortgagee property and selling it for $1,000. It was shown that the property was valued around $600,000. Of understandable concern to the defaulting borrower was his belief that the property was insufficiently marketed, auctioned in a sheriff’s office and done so “without reserve”. On these assertions, the sheriff pretty well followed the text book of what not to do when acting for a mortgagee who is seeking to realise a debt and do so in a court-approved manner.
Having established some principles that may restrict the opportunity to secure a definite bargain, buyers may well be left wondering just what is the attraction in pursuing a mortgagee sale. Buyers can rest assured that the mortgagee is motivated to achieve a sale. Emotion does not enter the discussion. The mortgagee does not view the property as a much-loved home and has no “rose-coloured” glasses concerning its value. An independent valuation is regularly the benchmark for the lowest level a mortgagee might accept at auction – and in a market like we are currently experiencing, valuers are hardly bullish.
Further, a mortgagee will generally refrain from marketing embellishments or “agent speak” in the marketing of property. The contract will be very clear and undertakings conservative. Mortgagees generally select agents who have a comprehensive understanding of the law pertaining to mortgagee transactions and ensuring that all boxes are appropriately ticked. What you see is what you get.
Here’s the bottom line to mortgagee sales – the mortgagee wants to secure a fair market price for the asset and cover its debt. Mortgagees wish to do so without being exposed to potential legal dramas from the defaulting borrower. If you are interested in pursuing a home and like the idea of dealing with an non-emotive, straight-forward vendor who has ideally engaged an informed and professional agent, who is genuine about securing a sale and whose pricing is guided by an independent valuation, then mortgagee sales are for you.
Brad Caldwell-Eyles is principal of 1st City Hasemer and Caldwell-Eyles.
