In tough markets, lenders and borrowers my come to head over the inability of the latter to keep up with mortgage payments. As it happens, many other financial reasons may cause a borrower to lose ownership rights to the property. In such cases, lenders usually enlist the services of auctioneers to make good the balance of the loan. This usually creates an opportunity for savvy buyers to make a killing. There are many cautionary tales however and below are some of the things that could go wrong:
Property serving as collateral for multiple loans
A bank’s claim on property put up for auction is limited to the outstanding loans against it hence the base price is determined by the outstanding loan amount. However, some owners may find ways to further charge a property for more debt hence the need to independently confirm that all financial claims to the property are known by the buyer.
Banks are only concerned with recovery of outstanding loan amounts. Other outstanding dues not cleared by the owner may have to be cleared by the buyer. These include rate and taxes, utility bills and other payments which may be substantial. As a buyer, you need to actually verify the bills yourself.
On becoming financially distressed, the owner may not also be able to maintain the property or the property may already have deteriorated due to neglect. In that case, the cost of bringing the property into good condition rests with the buyer.
Properties are auctioned on ‘as is, where is basis’. This means banks or other parties involved do not bear any liability should issues arise with the property in future. It is the buyer’s responsibility to inspect the property before engaging in a transaction.
Property titles with encumbrances
Don’t let the bank do the due diligence for you, an illegality may have happened after the bank making a mortgage e.g. for buildings, the buyer may have made extra-regulatory alterations to the plan which may present a bottleneck later. It is best to use the services of a good lawyer in this case.
A buyer also needs to make sure that the property is not jointly owned without their knowledge especially in the case of land. This is because additional owners may come out to cause trouble after the transaction.
Tenants in the house
Beware of tenants in the house. Banks usually ask owners to vacate the property in advance but if the owner has not vacated the tenant in advance, it may fall on the buyer to vacate them. This may prove a cumbersome task especially where the tenant has been occupying the house for long. It is preferable that the property be without a tenant.
Bidding higher than planned
Have a fixed upper limit and bow out if it goes higher than that. It is possible to let your emotions and or ego determine the price when you find that other bidders bid higher, don’t. Stick to the plan instead.
Not involving a lawyer
It is possible that some auctioneers do not follow the law to the letter depending on the kind of auction e.g. by not serving required notices to the owner which may give the owner grounds to challenge the legality of a sale. When such an action occurs, the buyer may have to wait for the verdict of the court before transferring the property.
There are arguments and counter arguments about the morality and immorality of an auction even though the legality is unquestionable. There is a place for sympathy and ethics however on a case by case basis. For instance, some people believe you should never buy your neighbour’s properties on auction. It might not sit well with your peace of mind if they end up on the streets. Probably the best arrangement is to make a deal with the bank, the auctioneer and the owner.
Auctions can be highly competitive and normally insider trading thrives. Banks my pass information to preferred clients for example. Getting an experienced hand is a big advantage.