Buying a distressed property

In the current economic climate, distressed properties serve as a warning about the impact of fluctuating interest rates and the general rise in the cost of living. They are also a reminder to make pragmatic, financially sound decisions..

Having your property repossessed is a homeowner’s worst nightmare. For investors and those looking to finally get a foot on the property ladder, though, these properties are an opportunity to secure a highly favourable deal – provided you do it sensibly with a good grasp of the pros and cons.

Definition

The three kinds of distressed properties are properties in possession, sales in execution, and bank-mandated sales.

Each symbolises a different purchase process and different benefits and advantages for buyers. For sellers, it means they have reached the end of their financial options and are unable to meet the repayments on the property, and the lenders are looking to recoup their losses.

Banks are generally keen to find fair and equitable solutions for bond defaulters and offer assisted property sales programmes, which have changed the way distressed sales are handled.

A sale in execution is set in motion by the bank when borrowers have repeatedly defaulted on bond repayments. After the bank has obtained a judgment against the defaulters, the Sheriff of the Court attaches their moveable assets for auction. If these assets do not raise the total amount of arrears, then the fixed property itself becomes a sale in execution.

Sales in execution are always conducted through auction bids, and the bank is obliged to set a minimum reserve price. This has ended the practice of selling off properties for ridiculously low sums.

Immediately upon the conclusion of a sale in execution, the winning bidder pays a 10% deposit plus the sheriff’s commission. This means buyers must immediately have the funds available to meet these upfront costs.

In a bank-mandated sale, homeowners who are unable to keep up with monthly repayments willingly hand over their property to the bank to sell on their behalf.

Bank-mandated sales are generally set at more realistic market-related prices than sales in execution or properties in possession.

The bondholder gives the bank a mandate to sell the property, and the bank then appoints an estate agent to effect the sale. The sellers have the right to decline an offer to purchase, as in any commercial transaction. If they refuse all offers or are unable to sell the property, the bank may eventually instigate legal proceedings, which most homeowners would prefer to avoid. For this reason, most reasonable offers would probably be considered.

Properties in possession

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

Offers on repossessed properties must be made to the bank through 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 that they will consider offers on the lower end of the scale.

Pros and cons

Whatever the category of sale of the distressed property, there are both advantages and disadvantages about which buyers should be aware.

Advantages include:

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

Favourable terms and conditions, including preferential borrowing rates and no transfer duties. Transfer fees are still payable, though.

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

Disadvantages are:

Properties are sold voetstoets, so there may be defects. Owners who have fallen behind on bond repayments may have also neglected the property's upkeep.

Viewing the property can be tricky as the current owners or tenants may deny access.

Offers on distressed properties may not be subject to the approval of financing or the sale of another property. This means you need to arrange finance before making an offer.

The transfer of distressed properties can take longer than a standard home purchase.

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

Bargains

Astute investors know that both skill and luck are usually involved when it comes to securing a real bargain.

This holds true, particularly when it comes to distressed properties, where the pitfalls can be as perilous as the rewards are rich. This is why having the right advice and knowing what you can comfortably commit to financially can make all the difference.

Distressed properties are listed under sheriff’s auctions in the Government Gazette and on most property portals such as here.

Courtesy of Private Property & Andrea Tucker of MorgageMe