Mortgagee Sales Buyers Beware

Posted on Thursday, October 17 2013

Due Diligence Is Still Required For Mortgagee Sales

In these recessionary times and with the number of mortgagee sales currently being exercised by Banks in New Zealand, investors and purchasers need to be very vigilant and aware of some of the legal ramifications including the need for proper due diligence to be carried out on a property being sold.

In purchasing a property being sold by the “mortgagee”, you are entering into a contract that is significantly different in nature from an Agreement entered into in other more common circumstances. This type of Agreement is likely to be significantly in the mortgagee’s favour given that the mortgagee will want to protect itself against factors outside their control, resulting in there being very little flexibility in terms and conditions. In addition to the usual range of purchaser’s due diligence conditions, investors / purchasers should consider the following:

Consider The following When Looking At Mortgagee Sales

1. Form of Agreement for Sale and Purchase: The mortgagee will have removed various sections in the agreement protecting the purchaser including the purchaser’s right to approve title and the vendor’s warranties.

2. Unauthorised Additions/Alterations: Particularly in the event that a purchaser has not been able to view the property prior to the Auction as the owner will not allow an inspection there will be no certainty that any work carried out on the property has the required permit / consent.

3. Secure Contractural Right to Vacant Possession if Possible: Purchasing a vacant property by way of mortgagee sale reduces the risk of the house and chattels being interfered with prior to or after settlement. In addition it spares the new owner of having to take steps to remove the previous owner who are in some cases very difficult and costly to remove.

4. Previous Owner in Possession: If the previous owner / mortgagor is in possession of the property and in the absence of any agreement as to vacant possession being supplied on settlement then purchasers are left with having to evict a previous owner / occupier following settlement. In addition the new owner may have to deal with damage caused to the house by a distressed and disgruntled former owner. In some instances the former owner may take chattels from the property in order and sell them off to pay various debts they may have leaving the purchaser with a property that is in fact diminished structurally and in value to what it was at the time the agreement was signed with the purchaser having no recourse.

5. Importance of Purchaser Due Diligence Enquiries Prior to Mortgagee Auction: Generally once a mortgagee sale contract is signed it is an unconditional contract therefore it is critical that all proper due diligence be completed prior to signing the agreement. This will include but is not limited to; title check, Land Information Memorandum (LIM) from the Local Authority; unconditional finance approval and builders report.

6. No Certainty: Notwithstanding that a mortgagee sale contract is ‘unconditional’, the terms may allow the lender to cancel the Agreement prior to settlement in the event that the owner pays the debt prior to settlement. If this occurs the purchaser has no certainty as to whether settlement will actually occur until the actual day of settlement.

7. Insurance Risk: The ‘risk to insure’ passes to the purchaser in most cases on the signing of the mortgagee sale agreement because the mortgagee ceases to accept responsibility for any loss or damage from the moment the hammer falls. It is therefore important that the property be insured immediately.

8. Chattels: Purchasers should be aware that the chattels located in a property do not generally form part of the property that is passing to the purchaser under the sale Agreement. If it is intended that the purchaser acquire any of the chattels this will need to be specifically recorded in the Agreement document.

Whilst mortgagee sales do offer an opportunity to purchase a property at a reduced cost there is a much higher standard of care and due diligence required by a purchaser. It is also important that you seek legal advice prior to the Auction.

We advise you to proceed with care, and if in doubt consult us to help you though the process.

Feel free to contact Anne Needham on +64 9 3034089 or +64 (0)272266084

By Anne Needham: Urban Legal

Mortgagee Sales


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Expert's Bio

Anne Needham

I have over 30 years experience in providing excellent residential property legal services to clients. I have an established local (NZ based) practice and also an extensive off shore client base having acted for clients dealing with New Zealand property who are located all over the world - the internet and cellphones have made this so very easy! In addition Rennie Cox/Urban Legal has been providing legal services since 1923 and is now a progressive modern law firm providing a wide range of legal services to clients.

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