Commercial Property - Foreclosures

Acumen Finance presents the pros and cons of landing an investment property deal through foreclosure auctions and mortgagee sales.

Nathan Daly
October 15, 2020

Commercial Property - Foreclosures

Everybody is looking for a good deal. And when interest rates drop, as they have across Australia, three-times in the last quarter, many commercial property investors react by buying in at all costs. While the low-interest rates are good news overall, this can set the stage for some even better deals down the road as some of those investors may not be able to uphold their legal obligation and the mortgagee is forced to repossess or foreclose on said property.

While purchasing foreclosure properties has its risks, Acumen Finance is here to shed some light on the pros and cons of this avenue for investing in these often heavily discounted properties, so you’ll be prepared to move when the opportunity arises.

What is a Foreclosure?

First, let’s look at the terminology to understand what a foreclosure is and isn’t.

Arrears: When a borrower stops paying on a loan, the loan goes into arrears. Eventually, the lender, or mortgagee, must act to salvage what they can of their investment by seizing and selling the property.

Pre-foreclosure: This is the time when the borrower misses his first mortgage payment and the date when the bank starts legal proceedings to take over the property.

Foreclosure: In a foreclosure, the lender has gone through the legal process of removing the borrower from the property title, and placing themselves as the legal owner on the deed. However, if the bank forecloses on a loan, they may forfeit any recourse they may have against the borrower for any amount still owed on the loan after a sale. For this reason, lenders prefer to repossess a title deed instead (see below).

Mortgagee repossession: Instead of foreclosure, lenders have the option to repossess the title deed by filing a Writ of Possession in the relevant state’s Supreme Court. While the borrower remains on the title, the lender is entitled to sell the property. Lenders prefer this method over foreclosure as it is more expedient while allowing them to get the highest possible market price. Further, the lender is entitled to pursue the title-holder (borrower) for any shortfall of funds as the result of payments in arrears. That said, any amount over what is due to the lender will be returned to the title-holder.

Short sale: The short sale is when the property is sold for less than what is owed on the loan. This was actually quite common in the wake of the housing bubble collapse and subsequent GFC of 2008. A short sale is, generally speaking, the same process as a regular sale; however, the owner (title holder) does not have the final say - any offers can only be approved by the mortgagee (lender). Once a deal is struck, the title-holder typically is relieved from any further financial obligation, unless the mortgagee files a “deficiency judgement” against the borrower. For a lender with too many vacant possessions, the short sale is the lesser of two evils.

Upside down: When the borrower owes more than the property is worth, and more than what they could get at the sale, the property loan is considered Upside Down. This is largely caused by low-doc or no-doc loans and predatory lending practices, of which APRA has taken steps to mitigate with increased regulations. It can also occur in severe economic downturns.

Distressed properties: This is kind of a catch-all phrase for properties that fit any of the above descriptions; they are repossessed properties including mortgage foreclosures and deceased estates - property or assets of a person who has passed.

Wholesale Properties: This is another catch-all term used to describe heavily discounted properties not typically listed in more traditional channels.

The Causes

While regional and national economics can play a significant role in communities with increasing “bad” loans, personal factors are just as culpable - and they know no boundaries. The obvious culprits are divorce, ill health, loss of income, the rising costs of living or living on credit, predatory lending practices, and, of course, the two things in life you can never avoid: death and taxes.

The Pros:

Once the lender has reclaimed the property, their only goal is to sell it to reclaim their investment costs; banks are not in the business of owning property, but that of making loans. Therefore, they are highly motivated to sell.

Some lenders will set the reserve price to the amount owed on the loan - often, well below market value. The benefit of purchasing a foreclosed property at auction is that the market determines the property value - it’s all transparent.

You might be able to buy below market by 10 to 30% depending on supply and demand. While mortgagees have a legal obligation to act in the “good faith” of the owner, it does not mean they are obligated to chase the highest price.

Properties purchased below market value instantly generate equity, can produce a higher rental yield, and are great leverage for the next investment.

The bank or lender arranges for all legal proceedings and pays all costs associated with the sale of vacant possessions.

Remember, you’ll get a better deal if there are more distressed properties up for auction, as mortgagees are even more motivated to sell and the competition won’t be as tough. But, too much inventory can be a double-edged sword...

The Cons:

If there are several distressed properties at auction from the same area, it’s a pretty good indication that the submarket, market, or the greater economy is also in distress.

Generally speaking, you’ll find that mortgagee sales are more common in lower socioeconomic parts of the country - areas that have historically low growth and are unlikely to ever significantly grow in value in the future.

Many distressed properties have been neglected - sometimes, for years. Be careful of the temptation to buy low, then over-capitalise by sinking too much money into repairs and renovations.

Banks have the right to set their own conditions for repossessed properties, removing certain rights that buyers typically have under a standard contract, such as a builder’s guarantee.

Finding the Opportunities

By law, banks are required to market repossessed properties through a public auction, to try to get the highest possible retail value for the asset. On a similar note, almost all repossessions are listed with real estate agents at a “regular retail price.” However, most foreclosed properties sell at auction.

Further, many local papers advertise notices of property foreclosures and repossessions. Another great resource is to visit one of the plethora of websites that list commercial property auctions for wholesale properties, such as WholesaleProperties and National Mortgagee & Deceased Estate Data websites. You can search other portals for the term: mortgagee sales to get listings across Australia.

But by far the most effective way to locate commercial property foreclosures and mortgagee sales before the information becomes common knowledge is through a trusted agent, especially one who specialises in the location and asset type you desire.

Be Prepared

To get in on these super deals, you should have done your homework well in advance: decided on what areas you’re interested in, what asset types you are looking for, and with the help of a professional broker, you should be pre-qualified by a lender.

As a trusted broker-partner, Acumen Finance has the experience, expertise and connections needed to prepare you for golden opportunities presented in this discount market. Their experienced staff can help you understand the realities of the market and your financial capabilities. Through their highly trained staff, they will produce a personal financial model and craft a professional credit letter. Through their connections and intimate understanding of the banking rules, regulations, the charters of Building Societies and Credit Unions, or through their own pool of Private Lenders, Acumen Finance will determine who is the most appropriate lender for you, saving you time, energy, frustration and unnecessary dings to your credit score..

When trying to secure your dream deal through a foreclosure, mortgagee sale, short sale or another distressed property sale, a lot of it comes down to luck. Contact us today to sway luck - and timing - to your favour.