Investor tip: ‘Paying less is not always the best investment strategy’
Buying a bargain from the bank through “mortgagee sales” are often seen by investors as a good opportunity to enter high-growth markets at a discount, but Property Buyer’s Rich Harvey believes that—as in all investment strategy—this one will only work well if backed up good education and research.
Mortgagee sales often happen when a bank takes possession of a property after a homeowner stops making mortgage payments, hoping to regain as much money to offset their losses as they could. These properties often go in public auctions to “keep the process as fair, open, and transparent as possible” for all parties involved and limit the possibility of the situation being taken to court, according to Rich.
Buying under market value
Banks tend to offer property investors a chance to purchase an asset below market value during mortgagee sales, depending on current market conditions. During mortgagee sales, the bank’s priority is to recoup losses, so they will be working hard to find a buyer who will pay just enough to cover the outstanding debt and other associated costs.
While this could be bad news for the homeowner, who is set to receive any profit made from the sale that goes beyond what the bank is owed, it’s a great opportunity for investors looking to grow their property portfolio.
According to NMD Data’s John Kovacs, buying properties at 10 to 15 per cent under market value will give an investor a buffer should growth stall in the area.
It also creates instant equity in the property, Crawford Realty’s Ryan Crawford said.
“I think some people might feel like they're taking advantage of someone else's situation [but] the reality is that if it's a mortgagee sale, the property has to be sold. It's going to go to some buyer regardless of whether it's an investor or someone else,” Rich added.
Investors beware
However appealing mortgagee sales may seem, buying repossessed properties under market value is not always the best strategy for creating wealth.
According to Rich, mortgagee sales often happen in lower socioeconomic areas, and while thousands of dollars in discounts sounds good, the property bought may turn out to be a bad investment because these areas are unlikely to see significant growth in value.
“That's not to say it's not a good investment area, but you have to look at the quality and the long-term value of the property you're buying,” he said.
As always, property investors must be wary of red flags that could deter growth in the area including a nearby highway or a petrol station as well as severe deterioration in the property that will require costly renovations.
Ryan advises investors: “Avoid any property that requires significant work unless you are very confident it will deliver a return. It's not a bargain if it requires significant renovation or replacement items, or if it's in an area with poor rental yields and growth prospects.”
Moreover, investors must also make it a habit to research on comparable sales in order to make sure that they are actually getting a good deal. Mortgagee sales tend to attract several buyers and the price may be pushed up above the current value of the property, so it’s best to come into auctions with a clear strategy in mind.
According to Ryan: “As with any investment, it's essential you set yourself a purchase limit … Thoroughly research the area and investigate what similar properties have sold for so you know what the market value should be, then don't pay any more than that.”
Aside from doing your own research, seeking the help of property professionals will also help you navigate your way through this venture.
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