Investing in repossessed properties

Home repossessions might signal bad news for homeowners, but for investors it can be a ripe opportunity to snap up discounted property

Low interest rates have been a double-edged sword – while one person might have enjoyed increased cash flow over the last few months, others have struggled under a mountain of debt.

The result, for the latter, has often meant mortgage arrears, defaults and at the very end, repossession.

It’s bad news for those who have over-capitalised but it could signal a good opportunity for comfortable investors. Repossessed properties – sold by the bank, usually at auction – can be as much as 20% cheaper.

Why invest in distressed properties?

If you’re wondering why anyone would want to invest in a property that has forced a previous owner to default on their mortgage, the answer, simply, is the discount. “At this present moment, 10–20% less market value is achievable on repossession homes,” says NMD Data’s John Kovacs. “They provide a more affordable way to enter the market and they may only require minor repairs or renovations. And renovations are likely since the majority of repossession homes are left rundown by struggling owners and the non-property-minded banks.

“It’s absolutely crucial for any investor wanting to buy a mortgagee repossession that they have all their finances in order,” says Kovacs. “They should be budget-conscious and find out all the costs involved, such as land tax and stamp duty and know your limits. You don’t want to pay too much – research is the key to find out exactly what the property is worth.”

Do they stack up?

Providing the numbers add up, investing in repossessions could prove a fruitful move. “Investors should definitely be keeping an eye out for repossessions coming onto the market,” says Jan Malmstrom of LJ Hooker.

“They’re usually vacant possession which means no delays in tenanting the property and are generally competitively priced in the market.”

On another positive note, Martin North of Fujitsu Australia, who publishes a regular report on the mortgage industry with JPMorgan, says that unlike the US, which has seen wave upon wave of repossessions leaving run-down ghost towns in its wake, Australia’s market has picked itself up again.

“Chances are we’re going to continue to see an undersupply of property in Australia,” he says. “We have a deeply rooted problem where there isn’t enough property and a rising population. If you are an investor who is well-capitalised and can afford to borrow – even if rates went up by 3% from where they are today and that isn’t going to create a problem for you – I don’t think [investing in repossessions] is a bad strategy.”

Financing repossession homes is similar to any other purchase, but you should ensure that the property is in a livable condition since lenders won’t take security over properties that are not habitable.

“There is a perception that mortgagee sales are a great opportunity to pick up a property cheaply because the mortgagee needs to sell the property,” says Michelle Coleman of WHO Finance. “This can be fruitful for some investors but without the proper research can also trap investors into thinking they’re getting a bargain.”

Ethical issues

However, financial rewards aside, there is a stigma attached to buying repossession. John Kovacs’ clients refuse to talk publicly about investing in repossessions, fearing they will be judged insensitive and unethical.

Kovacs thinks investing in repossessions can have a positive effect on a market. “It’s a sensitive and controversial issue but the thing I keep stressing is what impact these mortgagee repossessions have on property prices,” he says. “The more mortgagee sales you have in an area, the quicker property prices fall and it has a ripple effect on other suburbs. We do need to sell these properties as quickly as possible at the best price – I wouldn’t like to wake up one morning and find that my property price has fallen by 20% because of mortgagee sales in my area.”

Like in the US, there are three stages in the Australian repossession cycle. Firstly, the owner defaults on the mortgage and the property is sold by the owner with consent of the mortgagee. Secondly, the owner voluntarily surrenders, again in default, and hands over the keys to the mortgagee. Finally, if the property isn’t sold, it’s formally repossessed by the bank and sold.

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  • Kazz says on 14/02/2013 02:41:56 PM

    Property is property! Unless it is your private residence, it is an inanimate object, a tool for you to work with. Does it do the numbers? Can it be valued added to? What is the possible rental yield, vacancy rates etc? Location to services? The same questions that need to asked and answered if you were buying the usual private treaty sale also need to be answered with this property. Dont get hung up with the emotion of it. If you are going to create a rental property - remember that you are supplying a home for someone else to live in. This is a service to the community. If the property is going to be your PPOR, then it will be your home, love it for what it is, a place for you and your family to call home. In each instance this property fulfills the role you require of it irrespective of the emotion you may place in it just because it is a morgagee in possession sale. Move on from that and give the property a new lease of life allowing it to be a home for someone, thats what it was built for!

  • Jenny says on 26/02/2013 01:16:15 PM

    Well said Kazz! I totally agree.

  • Jhai Mitchell says on 15/06/2013 04:02:37 PM

    Kazz you owned this answer!

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