The word on the street is that repossessed houses for sale are up to 30% cheaper than regular houses for sale, at least in the UK. In the USA, the term people will be searching for when looking for houses that have been reclaimed by financial institutions like banks, building societies etc is foreclosures. In this article, we discuss the wheres and why’s of repossessions. How to search for them if you are looking to buy property where the previous owners have had the property taken from them and some of the pitfalls and benefits of this type of investment property purchase for UK property investors in particular.
What Defines a Repossessed House?
When a buyer purchases a property, it is usual for them to secure a mortgage on the property in order to purchase it. Not many people have enough funds to purchase a property outright, and so a mortgage is required in order that the seller get’s the purchase price and can pass the property on to the buyer.
In order to get the mortgage from a financial institution, the purchaser will usually have to prove that they are a good credit risk and also provide a deposit of anything between 5 – 20% of the purchase price or property valuation. If the buyer is a commercial company, then the deposit may be up to 40%.
With a deposit and a buyer that has a good credit history, the financial institution may agree to load the buyer the balance of the purchase price, and will secure the loan on the property, taking out what is commonly referred to as the first charge on the property.
The lender with the first charge on a property has the right to decide what to do with it, if the borrower fails to maintain payments on the loan secured on the property and can repossess the property as a method to regain any outstanding loans secured.
A repossessed house therefore, is a property that the lender with first charge has taken back, and has put on the market for sale in order to retrieve the outstanding debts owed on the property.
Why Are Repossessed Houses Cheaper?
This is a valid question, the answer to which may prove surprising. Repossessed houses are not necessarily cheaper than those that haven’t been repossessed. The reason why is this. Financial institutions want to get back all the money owed to them on the property. Imagine you’re a bank and you’ve loaned someone £266,000 to buy a £280,000 3 bed semi somewhere and then 2008 hits and property prices begin to slide in the wrong direction.
You previously credit worthy borrower who bought the property only 2 years earlier is finding it ever more difficult to make his mortgage payments and then he loses his job. Unable to find work in a highly competitive jobs market, he finally calls time and hands you back the keys having made only 2 of the last 10 due mortgage payments. What is worse is that it is now March 2010 and the property has devalued and is now worth only £238,000 which is less than what you loaned. Are you going to settle for a purchase price 30% below that? or are you going to hang on for every penny that you can and push for the highest price?
So as you can see by this example, the case for repossessed property being cheaper than market value is not always made. That said, it is possible to find repossessions that are indeed on offer for below market value, and these are the ones for which savvy investors are on the lookout.
How Do Investors Find Repossessed Properties To Buy
In a recession, repossessions unfortunately are everywhere property is being sold. This is an unfortunate fact. The problem property investors have is that they need to find them, make an offer and snap them up for the lowest prices possible in order to make a good return. So the competition to find repossessed property, that will produce good returns is high.
The property market crash that occurred during the 1980′s in the UK brought repossessions into the public consciousness and it has never really left. The spectre of the same thing happening now is ever present with threats of cuts in jobs, public spending and ‘feeling the pain’. The truth is everyone who wants to buy a property is aware that buying a repossession could be the way to go if you want to buy cheap property, this just makes it harder for professional investment property buyers, especially those who are just starting out and who don’t have a network or resources that will give them first nod when a property for sale be mortgagee, comes across the desk of the local Estate Agent.
Now, the most obvious place to look for repossessed property is in the auction catalogue. The phrase ‘for sale by order of mortgagee’ or something similar will appear over the listing in the auction catalogue. This makes it very plain. However, the auction isn’t necessarily the place where that property will have first appeared.
It is most likely that the property has first appeared in a local estate agent. Can you guess why that is? If not, we can tell you that it is because the Estate Agent is the person most likely to get the most money for the property. Remember, people go to property auctions, just like any other auction, to get trade prices. Forget the fact that the auctions are not the preserve of builders, property developers and portfolio managers. Regular members of the public attend them in the hope that they too can get a property bargain.
The financial lender does not want ‘trade prices’ they want ‘retail prices’ i.e. they want to get the full market value for the property and the best place to get this is usually in the local high street, with the local estate agent. So you as an investment property pro need to make contact with and maintain a network of contacts within your local area of agents who can let you know when new properties are about to come on the market as soon as they arrive on their desks.
Even if that agent is not willing to tell you outright that the property is a repossession, you can still look for some some telltale signs. In the listing you can look for properties that have the following
- No Chain
- Vacant Possession
- 28 Day Completion
- Public Notices
What do these things indicate to the savvy property buyer? Potential!
No Chain Property
If a property has no chain, then the buyer will not have to wait for the seller to complete on an onward purchase before they can exchange contracts and complete the sale. No chain does not always indicate that a property is a repossessed one however, but it is a useful indicator. In any case, any investor worth their salt knows that time is money and they don’t want to hang around trying to do a property deal with someone who is 4 in a chain that has 10 people in it. That deal can fall apart at any time and the hassle is not worth it.
Vacant Possession
As with ‘no chain’ property purchases, investors also want vacant possession, unless they are buying with tenants that they aim to keep on. Vacant possession allows remedial. modernisation and remodelling work to begin immediate a purchase is finalised in order to turnaround the investment in the shortest possible time so this is something that for an investor, is desirable. All property that has been taken back by the mortgagee will have vacant possession, so once more this is also a good indicator to bear in mind.
28 Day (or less) Completion
When I bought my first house, the offer was excepted with a provision that contracts be exchanged in 20 days, with completion within 7 days of exchange. The seller was a property developer who wanted the property to turnaround in an extremely short period of time. I was very happy to do all the work on my end in order to meet this deadline. Financial institutions wanting to turnaround repossessions quickly in order to get their money back as soon as possible so a 28 day completion is something on which they will likely insist. Again, it is not a surefire 100% indicator but it is a darn good one.
Public Notice Homes
Now this one is a surefire indicator that a property for sale is a repossessed property. Quite simply a public notice period in the context which we are discussing here, is the period between an offer being made on a property and the contract exchange. The public notice will take varying forms and it may appear in the local newspaper. In essence it will alert you to the offer price that has been made, and will invite you to make a higher offers be made prior to contract exchange.
So Now You Know
Informed property investors are those who are best placed to take advantage of situations to buy property at the best prices possible. Whether you’re buying unsold property lots, or buying repossessed houses for sale, the idea is to get the property at the best price possible in order to achieve the highest return on your investment.
I have a problem with a local purchase of property. I cannot seem to find the right place to get advise as everybody I have spoken to says it is not in their domain. Maybe you would be able to help with advice or steer me in the right direction as I don’t think I am being treated in a fair or potentially legal way?
Briefly : I saw a repossessed property for sale locally a few weeks back with an asking price of £147k and a public notice of accepted offer of £152k.
I placed a verbal cash offer above this figure which was rejected as the estate agent verbally informed me that the other party then increased their offer. This went on for a few days of bidding over the phone with me stopping at £160K. All of my bids were subsequently formally rejected by letter.
A public notice was then again issued at £160.5k. Presumably the final offer from the other party I was bidding against.
A few days later estate agent phones to say other party cannot proceed and that the property would be remarketed at £147k again. I was not asked specifically if I wanted to maintain my bid of £160k. I immediately placed an offer of £152k as I knew that this had been accepted before we came along, and feel that if it was not for me bidding against ‘somebody’ who could not proceed then I would not have bid so high. In addition, I do not feel responsible for the estate agent’s decision to remarket at £147k.
My offer of £152k has been rejected by either the mortgage company or repossession company on the grounds of “we don’t think we want to deal with people who move their offers up and down”.
No other offers have been accepted and the house is still being marketed at £147k with no public notices.
Is this legal ? I thought they were under a statutory obligation to get the best price? If it is legal, it does not make any sense !
Incidentally, I am a cash buyer who can proceed straight away, and we were required to show bank statements to the Estate Agents to prove our ability to proceed before we were allowed to view the property.
I would be grateful of any advice that anyone could offer.
Hello Ian, I have posted your comment so that perhaps some of our readers may be able to help answer your question. As I understand it, the repossessor is under an obligation to obtain the best price possible, but they are not committed to anything until contracts are signed. If this is the case, they may come back and accept your offer at a later date if after a prescribed period, they don’t receive a higher bid. I don’t think any seller is going to refuse and offer based on “we don’t think we want to deal with people who move their offers up and down”, I think this is a red herring, as if you’re a cash buyer and you’ve proved you have the funds, then the seller is going to to be very interested in your offer, they may be just holding out so see whether your offer can be bettered. There are many stories like yours, check out some here http://forums.moneysavingexpert.com/showthread.php?t=556413