If you’re a buyer in the right place at the right time, mortgagee sales can present an excellent opportunity. However, that doesn’t mean that all mortgagee sales advertised on a real estate website are going to be dirt cheap.
The main belief that’s held about mortgagee sales is this – the bank doesn’t want the property, so they’re going to sling it for the price of some milk and a loaf of bread just to cover their debt.
The primary point that you need to bear in mind with a mortgagee sale is that it’s under the control of a (usually large) financial institution and not an individual. Which do you think will be more reluctant to accept a lower price?
What is a mortgagee sale?
Through a lengthy legal process, if an individual stops making their mortgage payments, the bank has the power to reclaim their property.It can then be sold to recuperate any debt still owed.
It’s not always as clear-cut as debt. Many mortgagee properties are acquired as a result of owner unemployment, death of a family member or long-term illness.
Regardless of the circumstances, however, reclamation of a property is a soul-destroying time for any mortgagor. So, why are buyers so quick to run in the direction of mortgagee sales? It’s largely down to commonly-circulated myths that aren’t necessarily true. In this article, we’re going to cover the top 4, so you know what you’re dealing with in the future.
1) Mortgagee properties go for record-low prices
In a tight market, low buyer interest can see mortgagee property prices dropping to 15% below the market value. That doesn’t mean that it’s always the case, though.
The price of a mortgagee property is set by the market median, not the financial institution looking to quickly recover some debt.
That doesn’t mean that buyers can’t still nab a bargain, however. In mortgagee auctions, buyers are often reluctant to bid above market value, which means you can still get a property for less than usual. Just make sure you’re prepared that this isn’t always the case.
2) The bank is in a rush to sell
Many people think that, since they’re not real estate agents, banks are looking to get the property off of their hands as soon as feasibly possible.
Although banks might be keen to recover the debt they hold, there are strict laws in place to protect the interests of the mortgagor. If the mortgagor believes that the sale has been rushed, they can claim compensation from the bank for unsatisfactory marketing efforts resulting in the lower price.
For this reason, many lenders will even omit the phrase ‘mortgagee sale’ from listings, in order to limit any perceptions of them selling the property at a low price. Agreeing a sale at below-market value prior to an auction can also beckon scrutiny from regulatory bodies, so it’s in the bank’s best interests to make sure all of the boxes are checked.
3) Price is determined by size of debt
The bank’s only interest is recovering their debt, so if they’re owed $200,000 on a $500,000 property, they’ll only seek $200,000, right?
Wrong. Despite the fact that they’re no longer owners of the house, mortgagors reserve the right to make sure the house is sold at a satisfactory price. This is because they receive the amount left once the debt and sales costs are paid.
For this reason, it’s in the best interests of the bank to make sure they land a good price.
4) If an offer covers the loan, the bank will take it
Once again, this isn’t strictly true. As a legal requirement, lenders are obliged to attain an independent valuation prior to listing the property for sale.
As always, it’s the prospective buyer’s responsibility to research the market median in their area prior to making offers. Although occasional, mortgagee properties don’t always go for below-market value.
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