With house prices soaring, can mortgagee sales really offer bargains? The eight pitfalls of forced property sales!

According to New Zealand statistics for 2020, 16,234 businesses closed permanently during the year because of the pandemic. This is a distressing figure, because the unemployment behind it affects every family's livelihood. Some families, facing unemployment and bankruptcy, become unable to repay their mortgages, and their homes must ultimately be sold at forced auction. This is called a mortgagee sale, one type of sale commonly referred to in the Chinese community as a court-ordered property auction.

We understand that 21 homes in Auckland are currently being offered through mortgagee sales. With house prices so high, many Chinese buyers consider themselves fortunate if they can buy a home below market value this way. However, everything has two sides: while forced property sales may offer a chance to secure a bargain, they also carry substantial risks. Below, we examine their advantages and disadvantages to help inform your property purchase.

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How forced property sales arise

A court-ordered property sale is an auction enforced by a court. When a mortgage debtor cannot fulfil the mortgage agreement or repay their debts, the debtor may apply through judicial proceedings for the court to enforce a sale of the property in the debtor's name, with the proceeds used to satisfy the claim. A home auctioned through this process is what is known as a court-ordered sale property.

The most common situation is where a bank or other financial institution exercises its legal rights to auction a mortgaged home and recover its money because the borrower cannot repay the loan.

 

Sources of forced property sales
To understand the advantages and disadvantages of forced property sales, we first need to examine how they arise.

1. Commercial lending

A buyer takes out a mortgage with a bank to purchase a home. If they cannot make the full repayments on time, the bank exercises its legal rights as a creditor and seeks an auction of the mortgaged property to repay the loan.

2. Private lending

A private loan is secured against a property, but the borrower cannot repay it when it falls due. Under the law, the creditor cannot take ownership of the mortgaged property directly. Instead, they can apply to the court for enforcement under the secured loan agreement, with the property auctioned to recover the loan.

 

3. Judicial confiscation

If a judgment in a criminal case orders the confiscation of all a suspect's personal assets, any real estate involved will also enter the court-ordered auction market, with the proceeds going to the government treasury.

Which forced-sale properties might offer a bargain?

1. Discounted prices

Discounted prices are currently the biggest attraction of the forced-sale property market. Prices are generally around 10% below market value, and some properties offer even greater discounts after repeatedly failing to sell at auction.

2. Good locations

If you are lucky enough, you may find a particularly good forced-sale property: one in a desirable area with good schools and in good condition. Being able to buy such a home at a low price would certainly be fortunate.

 

The risks of forced property sales：Eight pitfalls of forced property sales

The benefits naturally come with risks. Not every forced-sale property offers such good fortune, and most carry potential risks. Below are ten possible risks associated with forced property sales.

1. Being unable to move in
There are often various reasons why you may be unable to move in, such as the bank being unable to get the owner to leave, severe damage to the home, or outstanding debts. These can ultimately consume substantial time and money, leaving the home uninhabitable for years and causing heavy losses.

2. A history of criminal incidents
To establish whether a forced-sale property has been involved in a criminal incident, try gathering information from several sources. In New Zealand, agents are generally required to tell buyers and tenants if a home has such a history. However, there have also been many cases where agents deliberately concealed it, resulting in buyers purchasing such properties at auction.

The best approach is to ask neighbours and property managers, and keep an eye on the property's sale listings. Homes that repeatedly fail to sell at auction tend to have problems of one kind or another.

3. No guarantee of a peaceful handover If someone's home is forcibly taken away and auctioned, the owner is unlikely to be very cooperative with your purchase. In serious cases, physical confrontations may even occur, bringing police involvement and a host of other problems.

4. Complex debt arrangements
Some owners may have mortgaged their home repeatedly to different creditors, meaning there may be more than one creditor with a claim against it. The new buyer must engage a lawyer to settle these debts before they can own the property.

5. Settlement issues
Banks generally cannot guarantee buyers a settlement date.

6. Owners or tenants may “dig their heels in” and refuse to leave
Even if you have already paid the bank, that does not mean you will take possession of the home smoothly. Owners or tenants living there may be unwilling to move out, and there is no knowing how long you may have to deal with them.

7. The home may be deliberately damaged

Owners do not want their homes sold at mortgagee auction, and many are angry at the bank's actions. They may deliberately damage furniture or walls, or take everything they can remove.
 
8、Banks may decline finance for forced-sale properties
Some forced-sale properties involve complex circumstances. Besides the first creditor, usually a bank, there may be a second or even a third creditor. If the sale price may not cover all the debts, the creditors must agree on partial repayment and the removal of any caveat before your bank may consider approving your loan.

            

How can you avoid the risks of forced property sales?

1. Buyers are advised to obtain a Building Report

Before buying a forced-sale property, buyers are strongly advised to obtain a building report, gain a detailed understanding of the home's condition, and proceed only once satisfied that everything is in order.

2、 Find a specialist lawyer and obtain a detailed written report

Whether you are new to the property market or experienced, you are advised to engage a specialist lawyer before buying this type of home. Have your lawyer carefully review every clause and explain every risk in writing, ensuring that you are fully informed and understand every cost. This is extremely important! 

3. Ask friends in real estate for more information

If you have friends working as real estate agents in New Zealand, ask them for information and listen to their advice.

4、 Buying this type of property is not recommended without sufficient understanding

You are advised against buying this type of property before investigating it in greater detail. The risks are considerable, and any dispute can come at a substantial cost in both time and money.