Now is a good time to buy distressed and repossessed properties thanks to low interest rates and available stock in the property market.
A distressed property can be defined as property that is under a foreclosure order or is advertised for sale by its mortgagee.
Brad Allen, distressed property specialist from Investment Property Specialists (IPS) says the property cycle is currently experiencing tough times and growth is expected to pick up towards the end of 2012 depending on the global economy.
“The lack of financing to buy property for many is hampering growth, making this a buyers’ market for those who can afford it.”
On distressed property sales, he says he has negotiated deals from 50 to 80 percent of bank valuation (not market value) for buyers and this is dependent on area, price bracket and demand for that type of property.
Understanding the difference between a distressed and repossessed property?
Asked to describe a distressed property and repossessed property, he says nowadays more than one missed home loan repayment classifies the homeowner as being in distress with the banks.
“A distressed property can be defined as property that is under a foreclosure order or is advertised for sale by its mortgagee.”
He explains that a distressed property usually fetches a price that is below its market value and is sold by the owner in order to prevent foreclosure of the property, to try and cut the potential financial losses.
The distressed seller and lender have to agree on the selling price, terms and conditions and there is still transfer duty payable on purchase prices above the R600 000 transfer duty threshold.
A repossessed property is a property that is taken back (normally purchased back at Sale in Execution auction) into the possession of the lender, which usually is the bank.
Repossession is done out of pure necessity and the only way the bank can get its own back or get reimbursed for late or even outstanding payments.
“The home owner must default on his or her payment in such a way that the bank sees no other option but to repossess the property to cover the debt.”
The home owner must default on his or her payment in such a way that the bank sees no other option but to repossess the property to cover the debt.
He says there is no transfer duty payable when purchasing repossessed property from the bank.
A property is labelled distressed when the homeowner can no longer afford the bond repayment and has consistently missed the monthly bond repayments.
Some banks have programs to assist distressed homeowners and assist them with more favorable bond repayment terms and interest rates.
These include Quick Sell program offered by FNB, Absa also specialises in repossessed property sales and so does Standard Bank as well as Nedbank.
Guide to buying a distressed or repossessed property
Allen says it is fairly difficult to purchase distressed or repossessed property if you do not have the knowledge or contacts.
This he says is because of the timelines involved in obtaining feedback and information supplied by the banks, sensitivity of the situation when dealing with distressed sellers as well as access to the properties.
Once a would-be buyer overcomes the hurdles and finds the property they would like to buy, here is what follows:
- A would-be buyer requires pre-approval finance when purchasing one of these properties
- Banks are most likely to tell the would-be buyer that they do not do pre-approvals and that one needs to sign an offer to purchase before applying for finance. Some banks have divisions that deal with pre-approvals specifically for distressed or repossessed properties.
- A buyer would need to have proof of funds or pre-approved finance as minimum securing deposit to submit a firm offer to the bank.
- Once the agreement has been accepted by the seller/bank, finance is in place and required deposit paid, the process is almost the same as normal property purchasing.
However, he says he has on several occasions tried the various websites that offer bank repossessed properties directly from the banks and was assured they have the latest information and updates regularly.
Despite this, he says he found it very frustrating to try and follow up on his offers with no single point of contact and long lead times before an offer was finally accepted.
This could take months and in some cases, the properties on offer turned out to have in fact been sold already while others were listed with incorrect addresses.
He says in South Africa, there are a handful of companies that have all the systems in place set up specifically to deal with distressed and repossessed properties.
Allen says it is fairly difficult to purchase distressed or repossessed property if you do not have the knowledge or contacts because of the timelines involved in obtaining feedback and information supplied by the banks, sensitivity of the situation when dealing with distressed sellers as well as access to the properties.
These companies have one single point of contact, pre-approval of finance contacts in the banks and can arrange for viewings for potential buyers.
Allen says many people assume that when buying a distressed property, the buyer is liable for all outstanding rates, levies, electricity and water.
This is normally only the case when purchasing from the Sherriff. Buyers need to ensure that the seller is liable for outstanding costs and that these are settled out of the proceeds of the sale.
In purchasing a bank repossessed property, the bank would have already settled the outstanding fees and the buyer is not liable for any outstanding costs.
Repossessed properties are almost always vacant as the banks do not want the hassle of tenants.
He says there is a cost associated for security to make sure it stays empty until sold which is why banks do not want to repossess more properties.
Advantages of buying these properties
- The purchase price of distressed or repossessed properties is below market value of between 60 to 80 percent.
- The financing terms are often more attractive with higher loan to values offered by banks when purchasing distressed or repossessed properties.
- Banks offer discounted transfer fees when buying a repossessed property and further discounts can be negotiated when purchasing more than one property through the bank.
- Because the bank is involved in the sale of the property, there is a fair amount of protection for a buyer.
Disadvantages
- It is a very active market currently and properties in areas of high demand are quickly sold.
- The transfer process can often take longer than a normal purchase (when distressed) because the same attorneys attending to the legal process of the distressed seller are normally often the ones who attend to the transfer.
- Lack of information is often a problem if you are not dealing with a single point of contact and lack of feedback can be frustrating if there is no point of contact in the banks.
- Repossessed properties are normally sold as they are and so any issues with the property with regards to planning and structure for example are for the responsibility of the new purchaser's account.
- One is likely to find that any changes to an offer to purchase provided by the bank will automatically be rejected.
State of the distressed and repossessed property market
It is believed that in excess of 100 000 homeowners in South Africa fall into this category. Many of these homes are expected to come onto the market in the next three years and this excludes the properties already repossessed by the bank which is hard to estimate given the lack of statistics from the banks, he says.
Allen points out that currently, more than one missed home loan repayment classifies the homeowner as being in “distress” with the banks.
“It is believed that in excess of 100 000 homeowners in South Africa fall into this category.”
Many of these homes are expected to come onto the market in the next three years and this excludes the properties already repossessed by the bank, which is hard to estimate given the lack of statistics from the banks, he says.
Asked about prices of these properties, he says most of the buying activity is in the properties priced between R100 000 to R800 000 and buyers are property investors and homeowners.
He says on average, only 50 percent of finance applications are successful and this hampers growth.
“Once liquidity increases in the market and finance is more available to buyers, the property values start to increase, so now is the time to buy.”
Allen explains that a short sale in the distressed property context means that a short sale occurs when a property is sold for less than the value of the mortgage attached to it.
Lenders enable brief sales when it is far more cost-helpful than to foreclose.
The borrower often negotiates repayments of the shortfall or a portion of it with the bank and a portion may be written-off by the bank as a loss.
He adds that this avoids costly legal fees, saves time and avoids the bank having to increase their repossessed properties stock holdings and avoids foreclosure and blacklisting of the homeowner. – Denise Mhlanga
Readers' Comments Have a comment about this article? Email us now.
There are 3 main categories in this market segment (for lack of a better phrase) rather than just the 2 mentioned. These have slightly different characteristics wrt transfer duties and outstanding rates and taxes. These are:
1.Distressed properties, still owned by the bond holder / original owner.
Any sale is as per normal proves. Transfer duties (or VAT if the seller is VAT-registered) will be due on the property. If the property is sold at auction, there will usually be transfer duties payable on the auctioneer’s commission in addition to the price. Seller will be liable for any rates, water, electricity, taxes and levies, and the seller will be required to obtain clearance certificates and electrical compliance certificates.
1.Repossessed properties being sold by the sheriff
These are referred to in your article. Transfer duties (or VAT if the seller is VAT-registered) will be due on the property. The sheriff will charge commission on the sale. The buyer will be liable for any outstanding rates, water, electricity, taxes and levies. Transfer duties will be payable at the full marginal rate on the outstanding rates, water, electricity, taxes and levies plus the property price. The buyer will be responsible for obtaining clearance certificates and electrical compliance certificates. Banks often bid at these auctions, and may set a reserve price such that even if the buyer gives the highest bid at the auction, the bank then cancels the sale as the price is too low.
1.Properties in possession, where the bank has bought the property from the bond holder / original owner (often at the sheriff’s auction). In these cases there typically isn’t transfer duty, as the bank is vat-registered.
In all instances, the bank/seller gets to choose the transferring attorney. - Doug
I see are some comments on the article which are incorrect. Doug refers to Transfer Duty being payable on repossessed properties as well as outstanding rates, levies, water and other expenses, this is incorrect. I referred to properties repossessed by the bank and not the Sheriff. Bank repossessed properties have no transfer duty payable and the purchaser is generally not liable for outstanding rates and taxes etc. A sheriff is not involved in re auctioning a repo property but a distressed property has to be auctioned by the Sheriff to become a repo once purchased back by the financial institution. I think Doug was meaning to say “Distressed properties sold by the Sheriff at a Sale In Execution” and not repossessed property sold by the Sherriff. Please send me Doug’s details. - Brad
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