Mortgagee in Possession Sales: Bargain or Bust?

By Erlinda Nunn

Unfortunately, due to an accident, illness or sudden change in life circumstances, a homeowner may be placed in a position where they can longer meet their mortgage repayments. When default occurs, the bank will take possession of and re-sell the property to recover its losses. These types of sales are called mortgagee in possession sales.

For purchasers who are in the right market at the right time, a mortgagee in possession sale may present itself as a great opportunity. However, they can also be ‘risky’ purchases. We answer some of the most common questions asked by purchasers when buying from a bank.

Is the bank just trying to get rid of the property?

Many purchasers often think that the banks only interest is to sell the property as quickly as possible. This is somewhat true, however the mortgagee is required to comply with the requirements set out in the Property Law Act 1974 (PLA). A mortgagee cannot exercise its power of sale unless or until:-

• Default has been made in payment of the principal, interest or any part of the loan;
• Notice requiring payment of the failed payment which constituted the default has been served on the mortgagor; and
• Default has continued for 30 days from the date the notice was served.

If there is any evidence to suggest that the sale has been ‘rushed’, or if the property has not been adequately marketed, this may give grounds for the mortgagor to seek compensation from the mortgagee. In the case of Pendlebury v Colonial Mutual Life Assurance Society Ltd, the Court found that the mortgagee failed to have regard to the mortgagor’s interest by inadequately advertising the property and failing to obtain a fair price.

How is the purchase price determined?

The mortgagee has a duty to take reasonable care to ensure that the property is sold at market value. While the mortgagee is acting on their own interests, and not the interests of the mortgagor, nevertheless, the mortgagee is obliged to act in good faith when exercising a power of sale. The mortgagee will want the best price on the property to at least cover the debt owing. While acting in good faith, the mortgagee is required to take reasonable steps to ensure the property is sold at a ‘fair’ price. Amendments to section 85 of the PLA provide that a mortgagee should take reasonable care to ensure that the property is sold at ‘market value’. The International Valuation Standards Council defines market value as:-

‘… the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion’.

Further, the mortgagee is required to obtain an independent and certified valuation before the purchase price is determined.

What do all of these Special Conditions in the Contract mean?

The Contract is often subject to a considerable number of Special Conditions.

These Special Conditions effectively contemplate the mortgagee sale, and provide that the property is purchased on an ‘as is, where is’ condition with all known faults and defects, with no rights of recourse against the Seller. This means that the Seller gives no warranties or representation in respect of the property. Upon entering into a Contract for a mortgagee sale, the Buyer acknowledges that they have made their own enquiries in relation to the property.

The mortgagee, who is often the Seller, is not the registered owner of the property, but is authorised to sell the property as mortgagee exercising power of sale pursuant to a mortgage which was granted to it by the registered proprietor of the property under the Land Title Act 1994.

Upon entering into the Contract, the Buyer will often acknowledge and agree that they do not rely on any representation, warranty, condition or other conduct which may have been made by or on behalf of the Seller.

The Special Conditions may also provide that a Buyer acknowledges and agrees that they have had adequate opportunity to conduct due diligence investigations into the Property and raise queries with the Seller about the property.

What are the risks of purchasing a mortgagee in possession property?

Buying from a bank doesn’t come without risk. As the mortgagee is not the registered owner of the property, they may not know or be obliged to disclose certain information about the property. Some of the associated risks of buying a mortgagee in possession property are that the registered owner may also be bankrupt and the trustee in bankruptcy may deal with the assets of the bankrupt and make payments to creditors when funds become available. This may also create further problems as a buyer may not be guaranteed to receive ‘clear’ title if there is money owed to secondary lenders.

The bank is not required to disclose certain information about codes of compliance, building permits or boundaries of the property. If for example, there were serious structural defects in the property or no approvals with the Local Authority then a purchaser may not have the ability to make any claim against the Seller or seek to terminate the Contract.

If there are any chattels or rubbish on the property, the Seller will often not be required to remove these items or clean the property prior to Settlement. A Buyer must also be aware that there may be outstanding outgoings on the property which may include rates or body corporate fees.

Can I raise a building and pest issues?

As these types of properties are purchased on an ‘as is, where is’ basis, a Buyers rights to a Building and Pest Inspection are often waived. A Buyer may still have the property inspected, as part of their due diligence, however there are no rights of termination if the inspection reports do not come back satisfactory. The Special Conditions may also provide that a Buyer will not be entitled to seek a reduction of the purchase price. A Buyer must be aware that the property being purchased may come with defects as the registered owner may not have maintained the property.

Before you buy from the bank, it is important you make enquires and carry out inspections on the property. If you would like more information on Mortgagee in Possession sales contact our conveyancing team on 4771 5664.