Buying at Mortgagee sale? Know your risks

If you’re looking to purchase a bargain, a mortgagee sale may look like your ticket. However, mortgagee sales are not without their risks.

When purchasing at a mortgagee auction you will need to ensure that you have completed all your due diligence prior to the auction. Which can include reviewing the LIM, having the sale and purchase agreement reviewed by your solicitor along with the title and having an unconditional offer of finance. It is important to remember that bidding at auction is an unconditional offer and should yours be accepted, you will be liable to complete the settlement.

Mortgagee sales differ from a standard auction as the bank is selling the house rather than the owner. The bank will have followed the default processes set out in their terms and conditions and in compliance with the Property Law Act 2007 which includes service on the registered owner with notice of the banks intention to sell the property to recoup the banks lending.

This might not sound much riskier than a standard auction until a review of the sale and purchaser terms is undertaken. Common risks are set out for you below. 

• Vacant possession. You are not guaranteed vacant possession with this sale, so you should not expect to move in on settlement. It would fall to you to ensure that you could take possession and will also be at your cost. You would be unable to start any eviction process until you become the legal owner of the property.
• Compensation for damage, or chattels not remaining at the property. The bank is unlikely to know the state of the property on settlement or before so will not provide any right to compensation for damage to the property. The previous owners may take everything they can get their hands on, including light fittings, carpets, hot water cylinders, heat pumps and fireplaces, curtains, and even kitchen cabinetry and appliances. A purchaser could be left with a shell of a house once they have gained possession. 

• Buying sight unseen. When you purchase you would usually have the chance to view the property (in some cases multiple times) prior to making an offer. In the case of a mortgagee sale, you will often have to view the property from the road and by pictures limiting you to an outside view only. Often the listing will only include outside photos, and these are often from a previous listing so may not reflect the current state of the property. Not having access to the property pre auction also limits your ability to have a obtain a builder's report or similar.
• No vendor warranties. In a standard sale and purchase agreement the vendor provides specific promises to the purchaser regarding things like the state of the property, demands from Councils, and building works. With a mortgage sale, there will be no warranties given as the bank will not be able to confirm any of these as they do not have day-to-day knowledge of the property. There is potential to buy a property with significant demand notices applicable to it or with building works being completed with no relevant code of compliance certificate for the work. This adds to the importance of obtaining a LIM and/or completing the thorough review of the council file pre auction.

As highlighted above, there are significant risks in buying a property at a mortgagee sale. If you are considering buying a property at a mortgagee sale, DTI Lawyers has a team of specialist property lawyers who can assist you with your due diligence investigation and advise you on your purchase. Our specialist lawyers can be contacted by phone on 07 282 0174 or by email reception@dtilawyers.co.nz