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Buying at Mortgagee Sale

Rising markets typically see few mortgagee sales, but as interest rates rise and the pressure comes on, you might start to see a few more on the market. 

So what is a mortgagee sale - and why are they often considered a bargain? 

For most people, the mortgagee is their bank - that is the lender who holds a mortgage on your property. Under the Property Law Act, if you cannot pay your loan, mortgagees have power to force a sale of the property and recover their money. When a lender does this it is called a mortgagee sale. Unlike other countries, the lender does not take possession. You can stay in the house for now - but they will force it to be sold after following the proper process. 

Sensing a desperate situation, the bargain hunting buyers will now move in to take advantage. While the lender is obliged to try and obtain fair market value, at the end of the day they want the property sold so will typically accept the best reasonable offer presented. 

In a quieter market with a motivated seller, this seems like a great time to snag a bargain. But beware - there are fish hooks for the unprepared as mortgagee sales are not conducted on the same terms as a traditional sale. 

 1.      if it is the family home for the owner, they are often agitated about the process and may obstruct your access to view and/or allow people in like building inspectors, valuers, engineers as part of your due diligence.

2.      the lender will not guarantee the purchaser vacant possession. If the home owner refuses to move out on settlement date - that is the purchasers problem to deal with and can be confrontational. Are you prepared to personally evict a family from their home? 

3.      the lender provides no vendor warranties. The property is sold ‘as is / where is’ so any hidden defects or missing consents the purchaser was unaware of cannot be claimed against the lender afterwards. 

4.      in some situations the departing and angry homeowner may damage or remove parts of the home. I’ve see kitchens and bathrooms removed, copper hot water cylinders taken, carpets lifted, and many other normal household items utterly destroyed before the purchaser eventually takes possession. 

Often properties marketed as mortgagee sales do sell for a discount, but for good reason as highlighted above. On odd occasions they can even sell at a premium as everyone assumes a bargain is available so competes vigorously at auction and ends up over paying. 

After the sale, if the proceeds are insufficient to cover the loan, then the balance owing stays with the borrower and they’re often pursued to bankruptcy. Interestingly this is not the case in the USA where their mortgages are ‘non-recourse’. This means that any shortfall after foreclosure (mortgagee sale) is the banks problem and not the borrowers.

That said, the mortgagee sale process is highly stressful and emotionally charged for those losing their property. I’ve seen the utter despair on peoples faces first hand, and urge you to be respectful and compassionate to the occupants when approaching these deals. A bargain for you potentially, but a sad end to happier times for those departing against their will.


Take care,

Scott Morison