Buying at a Mortgagee Sale – Four Things to Watch out for

Every year in this country hundreds of properties are sold by mortgagees.  Buying a property under such a sale can give you a great deal, but there are some pitfalls you need to watch out for.

1. Where the mortgagee enters a conditional sale and purchase agreement with an outside buyer, there are certain cases where the defaulting mortgagor can still redeem the mortgage and purchase the property back before the sale is settled. As a purchaser you should ensure the terms of your sale and purchase agreement specifically exclude this event.
2. Where the property is security for debt under one mortgage it can often be securing further debt under second and third mortgages, as well as charging orders and the like.  While the mortgagee sale will generally extinguish all these claims, there are some claims or burdens on the property that will not be extinguished.  A good example of this is where the previous owner has entered a 'restrictive covenant’ with the local council as a condition of resource consent not to develop a certain part of the property.  A purchaser should make all the necessary enquiries with local councils to find out if a property is affected in this way, before they purchase at a mortgagee sale.
3. If you have loaned money to any person which is secured by a mortgage and you are later put in a position where you have to proceed with a mortgagee sale the odds are that you will probably instruct a real estate agent to conduct a private sale.  But if you want to bid at the auction the law will not allow it. If you have any interest at all in preserving your right to bid in your own mortgagee sale you should get advice about conducting a sale through the High Court Registrar where this right will be preserved.
4. One of the features that distinguishes mortgagee sales from ordinary sales is the fact that the existing home owners interests are not the same as the mortgagee selling the home.  The home owners may have finance owing on household appliances and may try to salvage value out of house fittings before relinquishing possession.  It is not uncommon to find some homes sold in mortgagee sales literally stripped on the day of settlement.  In order to avoid this situation a purchaser should be aware of exactly what fittings and chattels are included and obtain advice on how to conduct an inspection immediately before settlement.  In some cases funds may be withheld if fittings and chattels have been damaged or removed.

Mortgagee sales are still a good way to make a property purchase, but purchasers should do their homework in advance and if in doubt they should get advice before they commit themselves to a contract.