Natalie and Mike had been traversing the newspaper for a new property for a few months.  They had heard that mortgagee sales were a good way to go as you might get  a property cheaply, so were very excited when a property they really liked came up for sale by the mortgagee. 

They bought the property at auction and settlement took place quickly.  Issues arose though when they parked their moving truck outside the property and started unloading boxes.  The person who lived there, and had defaulted on their mortgage repayments, was still living there and didn’t have any immediate plans to leave!

It pays to know all the facts or if this is not possible as many as you can establish before you jump into buying a “bargain” home at a mortgagee sale.  Unfortunately, the above scenario has occurred in relation to a number of mortgagee sale properties.  Although the buyer becomes the legal owner of the property on settlement and therefore is entitled to have possession of the property, a process needs to be followed to remove somebody from the property. 

When selling a property, the mortgagee has a duty to the owner to sell the property for the best price they can get, but there is no duty to ensure vacant possession of the property (i.e. an empty property). 

There is also no requirement for the mortgagee to keep the defaulting mortgagor informed, so it is possible that they may not know that the property has sold or when settlement would occur.  Although there has been some pressure to change the law in relation to this, this hasn’t yet been done.

In order to remove the previous owner from the property, your options are as follows: 

1. Obtain a court order for possession.  This can of course take a few days to go through the Court system and in the meantime the new purchasers are left out on the street. 
2. Get the owner to agree to move out.
3. Peaceably re-take possession (i.e. generally this means changing the locks but there are many other factors you should consider).

In order to avoid being stuck in a situation like the above, communication between all parties is the key.  Ask your agent to either contact the mortgagor themselves or to ask the mortgagee’s lawyer to contact the mortgagor to let them know when a contract is signed, and when settlement will be occurring.

You also need to be aware that some of the important Vendor warranties in standard Agreements for Sale and Purchase do not apply in mortgagee sales.  That means that if, for example, work has been completed on the property without building consent or the issue of a Code Compliance Certificate, the purchaser does not have the usual come- back to the Vendor that they would when the warranties are present.  Often there will also be no certainty as to which chattels (if any) are being sold with the home and the warranties as to condition and ownership of any chattels usually do not apply either.

Also, when you buy a mortgagee sale property, clauses in the Agreement which allow you to “requisition” title (i.e. request the Vendor to fix something on the title that is defective) are removed.  You therefore need to be doubly sure that you have done your homework in relation to the property before you sign the contract, including asking your solicitor to search the title for you and obtaining a LIM (Land Information Memorandum) and/or a Builders Report if required.

Access to the property is not always freely available when there is a mortgagee sale and this may affect your ability to obtain an adequate building inspection and it may also prevent your bank being able to adequately assess the value of the property for mortgage purposes.

Finally, occasionally angry owners whose house has been sold by the bank trash a house before they leave.  We always recommend a pre-purchase inspection before buying a property, but it becomes all the more important when buying a mortgagee sale property.  Having said that, at some mortgagee sales purchasers are buying completely blind and have no access to the property prior to purchase or prior to settlement.  This is extremely risky and you should expect any purchase price to reflect this level of risk.

The law may be amended in future given that there are predictions that mortgagee sales will continue to increase, but in the meantime it pays to make sure you have your eyes open to potential issues when you purchase a mortgagee sale property. 

It is possible to get a “bargain” by purchasing at a mortgagee sale but it does come with a high level of risk and all purchasers should undertake the necessary due diligence and seek sound advice.  Understand the level of risk and remember that you could be purchasing a problem, not a bargain.