Buying a repossessed property: Should you do it?

However, for switched-on buyers, a repossessed property can provide a unique investment opportunity.

A recent survey by comparison site Finder.com found that approximately a third of Australian home loan payers are behind on payments. Meanwhile, almost a fifth of those surveyed were behind by 30 days or more, 8 per cent by 60 days or more, and 5 per cent were considered “seriously delinquent” as they were behind by 90 days or more.

The figures indicate that there could be thousands of properties in the country at risk of being repossessed by lenders. 

While we don’t approve of anyone getting forced out of their property, it can be a “necessary evil” for everyone involved (the former owners, the lender, and the market) to move forward.

The sale of a repossessed property will give the previous owners the chance to repay their loan and a new buyer can potentially purchase it below market value. 

Before you consider buying a repossessed house, we’re here to help you understand what a repossessed property is and help you weigh your options before buying one. 

What is a repossessed property?

A repossessed property is a real estate property that was seized by a lender, as its previous owner was not able to commit to mortgage payments. 

For us to have a better understanding, let’s take a look at the process of mortgage repossession. 

When a borrower falls behind on their mortgage repayments, known as falling into arrears, the lending institution (e.g. bank) is legally capacitated to recoup the money it’s owed. 

The creditor can issue a default notice, which allows the borrower to catch up on the missed repayments (30 days) or apply for a hardship variation. 

However, if no action is taken by the borrower within the period specified by the lender in the notice, the lender has legal rights to retrieve the money it is owed.

To do this, the lender will apply to the courts to have an eviction notice drawn against the borrower. Once the repossessed home is vacated, it is then taken by the lender. Afterwards, the property is offered for sale through a real estate agent who is acting on behalf of the lender.

The money still owed by the borrower, along with other costs, will be deducted by the lender from the sale price. The balance (if there are any) is then given to the borrower.  

But what if the sale price is not enough to cover all the money still owed by the borrower? If there is a shortfall, the borrower will remain liable and will be required to pay the lender everything owed under the contract. This includes interest, costs, and other fees.

Let’s look at an example. John’s property is repossessed and they owe $600,000. If the lender sells the house for $650,000, the lender will take $600,000 (as well as all the costs involved in the sale) and John will receive the remaining money. 

However, if the property were to sell for $550,000, John would still be liable for $50,000 and the lender may not be able to claw back all the money it’s owed.  

What is the difference between a repossessed and a foreclosed property?

Oftentimes, repossessed properties are interchanged with foreclosed homes. 

While both are legal processes that refer to a creditor taking away from a borrower that failed to make their monthly payments, they have significant differences. 

In a foreclosure, the lender goes through the process of getting the borrower removed from the property title and putting themselves as the owner. Meanwhile, in a repossession, the lender will just get a court order to take over and sell the property, but the owner will still be named on the title. 

Most Australian lenders prefer repossessing a property rather than foreclosing it. This is because the process of repossession is more cost-effective and time-efficient rather than pursuing a foreclosure.

What the are benefits of buying a repossessed property?

Buying properties that are repossessed comes with its own perks. Here are some benefits to purchasing a repossessed home: 

• Properties can be bought below market price value. Because repossessed properties are considered distressed properties, banks want to dispose of these properties as immediately as possible. 
• Legitimate and quick purchasing process. It’s a common misconception that repossessed properties are unsafe to purchase. Contrary to common belief, the buying process of a repossessed home is legitimate, given that you are buying the property through a verified lender. Also, banks have transparency and accountability regarding the condition and legal documents of the property.
• Can offer a lower entry point for first home buyers or first-time property investors. Repossessed properties are ideal for those who are looking to have a foot in the door of the real estate market due to their generally lower sale price. 
• Can provide a better yield due to a lower purchase price. Because these properties are often sold under market value, it offers a greater profit margin when resold.
• Tax benefits. Investors can claim depreciation on fittings, fixtures, and improvements.

What are the risks/downsides of buying a repossessed property?

• Ethical dilemma. Many investors face the ethical dilemma of buying a property that used to belong to people who went through financial difficulty. Just remember that it doesn’t need to be a hard decision, as buying a repossessed property can actually help all involved parties. While it feels unfair for the previous home owners, the borrower can repay their loan and the lender can recover its funds after the sale. Remember that the situation can be more problematic if the property does not get sold. When these properties don’t sell, the impact on local values for all home owners in the area and surrounding suburbs can mean lower values and greater pressure on equity. Furthermore, the costs to the borrower can rise beyond the borrower’s equity.
• Risk of overpaying. If you rush into buying a repossessed property without doing your research on its true market value, you can pay too much for it. Additionally, the property may be located in a stagnant or minimal capital growth area.
• Buying the property in its current state. Because repossessed properties are usually sold on an “as is, where is” basis, you will buy a property at its current state. For example, a unit may be damaged or there are hidden maintenance issues with the property. 
• Existing liabilities. Repossessed homes can come with conflicts, such as being occupied by informal settlers or strong refusal of the prior owner to vacate the premises. 
• Overcapitalisation. If you’re not mindful, it’s easy to overspend on repairs and renovations.  

Tips for buying a repossessed property

Buying a repossessed home is a different ballgame compared to buying a regular investment property. Repossessed properties can be a real mixed bag, so here are our tips to help you successfully buy one: 

1. Enlist the help of an agent

Finding a repossessed property that is a good investment is not an easy task. They tend to sell quickly, so keeping tabs on them can be difficult.  Get a local real estate agent to step you through the process. Preferably, work with an agent that has experience with buying repossessed properties. They can inform you when there’s one that meets your requirements and make sure that you get your money’s worth. They can also provide valuable insight into property values, rental demand and trends in the area. 

2. Have a plan for the property

Have a clear idea of whether you’re going to live in the property, rent it out, or quickly flip the repossessed property you’re planning to purchase.  This will allow you to build a clear budget before viewing or researching properties. This will also prevent you from getting emotionally attached to a property that won’t be suitable.

3. Do your own research

As with any major property investment, doing your research is important. However, this is perhaps more vital with repossessed properties. Whether you choose to use an agent or not, doing your own research is important to make a good investment. 

Just because a property is a bargain does not mean you should buy it. Track the historical capital growth rate in the area, find out if repossession is a local trend, and research other growth indicators in the area. 

Smart Property Investment’s Suburb Search Tool can help get you on the right track. Simply enter the suburb name or postcode in the field above and press the suburb to get an insight on vital market info, including growth rates, vacancy rates, median house prices, time on market, and key demographic data.

Additionally, various online resources are available to search for repossessed properties. If it’s permitted, visit the properties that interest you so you can have a firsthand look at what you might be buying.

4. Ready your finances 

Lenders are not really keen on being home owners and typically want repossessed properties to be taken off their hands as quickly as possible so that they can recover their funds. In fact, each day that the property is not sold means they’re losing money. Because of this, the sale of a repossessed property often pushes through extremely quickly, so getting your funds ready to go — if your offer is accepted — is important. 

To speed up the process, consider getting a pre-approval for a loan. You can choose to work with a broker who specialises in repossessed properties. In some cases, brokers work directly for the banks and lenders who own the properties.

5. Be ready for repairs and renovations 

If the previous owner-occupier couldn’t afford their mortgage repayments, chances are that they also didn’t have spare cash for the upkeep on their property as well. With this said, have a financial buffer for a potentially hefty bill for repairs for the house. Upon viewing, make sure to inspect every nook and cranny to see what kind of repairs you’re looking at.  As mentioned, you don’t want repair costs to outweigh the lower price you pay for the property.

6. Be wary of restrictive conditions

Given that a repossessed home gets a sold stamp on it so quickly, buyers usually don’t have the option to negotiate the terms and conditions of the contract. That being the case, normal conditions such as a builder’s guarantee or cooling-off period may be waived, and changes to conditions may be void.

To be on the safe side, you should consider asking a solicitor to review the contract so you’re aware of the conditions and can make an informed decision as to whether you should push through with the purchase.