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Distressed properties: One person’s loss, another’s gain

Having your property repossessed is any homeowner’s worst nightmare. In the current economic climate, distressed properties represent a cautionary tale about the impact of changing interest rates, the overall increase in the cost of living and making pragmatic, financially sound decisions as a result, says Andrea Tucker, director of MortgageMe.

“For investors and those looking to finally get a foot on the property ladder, these properties are an opportunity to secure a highly favourable deal – provided you do it sensibly with a full picture of the pros and cons,” she says.

So what is a distressed property anyway?

These days, banks are keen to find fair and equitable solutions for defaulters and offer assisted property sales programmes, which has changed the landscape of distressed sales.

“There are essentially three kinds of ‘distressed’ properties: sales in execution, bank-mandated sales and properties in possession.

“Each represents a different purchase process and different benefits and advantages for the buyer, but for the seller, it means they have reached the end of the road and are unable to meet the repayments on the property and the bondholder is looking to recoup their losses.”

Sale in execution

A sale in execution follows a process set in motion by the bank when a borrower has persistently defaulted on their bond repayments.

After the bank has secured a judgment against the defaulter, the Sheriff of the Court attaches their moveable assets for auction. If these items do not raise the total amount of arrears, then the property itself becomes a sale in execution.

In sales in execution, which are always conducted via auction, there is an obligation by the bank to set a minimum reserve price, which has put an end to the practice of selling off properties for ridiculously low sums.

“Immediately on conclusion of a sale in execution, the buyer is obliged to pay a 10% deposit plus the sheriff’s commission, therefore funds must be available to meet these upfront costs,” says Tucker.

Bank mandated sale

In a bank mandated sale, when the bondholder is unable to keep up with monthly repayments, they voluntarily hand over the property to the bank to sell on their behalf.

Bank-mandated sales are generally set at more realistic market-related prices.

“The bondholder gives the bank a mandate to sell the property. The bank appoints an estate agent to effect the sale.

“The seller has the right to decline an offer to purchase as in any commercial transaction, although if they refuse or are unable to sell the property, the bank may eventually instigate legal proceedings and so most reasonable offers would likely be considered.”

Properties in possession

If a property does not reach its minimum reserve at auction or does not sell with a bank mandate, then the bank itself will buy it back and it becomes a property in possession, in other words, repossessed.

“Offers on these properties must be made to the bank via an appointed agent and can be declined or accepted at the bank’s discretion. Since repossession is a bank’s last resort it is sometimes more likely they will consider offers on the lower end of the scale,” says Tucker.

Where to find distressed properties

Distressed properties are listed in the Government Gazette (sheriff’s auctions) or on most property portals.

Pros

Finding an exceptional bargain, possibly in an area you would otherwise not have been able to afford.

Favourable terms and conditions, including preferential borrowing rates and no transfer duties [although transfer fees are payable].

The opportunity for a quick return on your investment if you can “flip” the property and sell at prevailing market prices.

Cons

Properties are sold “voetstoets” and what you see is what you get. Owners who have fallen behind with bond repayments may have also neglected the upkeep of the property.

“What you see” can be tricky, as access to viewing properties may be denied by current owners or tenants.

Offers on distressed properties must be “clean” and not subject to financing, or to the sale of another property.

Transfer can take more time than a standard house purchase.

Buyers may be liable for outstanding levies, rates and taxes.

“The pitfalls can be as perilous as the rewards are rich,” says Tucker.