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Distressed property must-knows: Can you find a bargain?

12 Sep 2018

The term ‘distressed property' refers to homes that have been put onto the market because the homeowner has fallen into some sort of financial peril and needs to be ‘rescued’ from their debt. Admittedly, many of these properties require a bit of work, but they do provide an opportunity for buyers.

With bank-mandated sales, homeowners may still reject offers they deem too low, but are usually willing to accept low-ball offers just to avoid having their property go to public auction.

“The misnomer is that it is not the house that is in distress, but the homeowner," says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa. "Through the RE/MAX Certified Distressed Property Advisor programme, we train our agents to deal with these delicate and highly emotionally charged transactions. We aim to assist the seller in reducing their debt to zero or as close to it as possible by providing the best service to both the seller and buyer.” 

Sadly, in these trying financial times, he says they are likely to see an uptake in the amount of these kinds of sales until our economic outlook takes a turn for the better.

"Rather than avoid these sales, buyers could potentially pick up a bargain - especially since their buying power is likely to be equally affected by our current economy. And, in so doing, they can help save somebody from their own financial troubles at the same time.”

To help buyers understand these kinds of sales, Goslett explains the three corresponding terms used to describe these properties:

1. Bank-mandated sales

These sales are the first stage in the downward spiral of distressed property sales and are usually the less risky of these sorts of transactions since the owner is on board with the sale. Hopelessly behind on payments, the mortgage-holder usually volunteers to have the bank put the house on the market to recover the rest of the debt owed to them rather than attempt to catch up on the payments. In these cases, homeowners may still reject offers they deem too low, but are usually willing to accept low-ball offers just to avoid having their property go to public auction.

2. Sales in execution or public auctions

If the sale is taking too long, the bank may decide to take things to the next stage. After obtaining the required approval from the High Court, the property can be sold at a public auction. Rather than holding out for the best price, these sales aim to recover the outstanding debt owed to the bank and any associated costs in the quickest way possible. For this reason, a recent addition to Rule 46 by the High Court was made at the end of last year which, in short, makes the process more difficult for banks to go the route of a sale in execution and encourages them rather to place the property on their distressed programmes.

“However, buyers who do manage to purchase at auction can get really good deals, but they have to act quickly, and might be liable for any outstanding rates and taxes on the property. Be sure to read the fine print carefully before signing the purchasing agreement,” Goslett advises.

3. Foreclosure or bank-repossessed property

Should the property fail to sell at public auction, the bank then takes possession of the home and mandates the sale to their chosen estate agent. “Buyers can get good deals on these sorts of properties, as this is the last hope banks have to recover their costs,” Goslett explains.

See repossessed property for sale 

Also to note

“The key with all of these properties is to remember that you get what you pay for. If the price of the property sounds too good to be true, the reason is usually that the home isn’t in great condition,” says Goslett.

“When considering these properties, buyers should set a buying budget as well as an additional renovation budget. It is not always easy to arrange to view these kinds of homes, but it is still worth chatting to a contractor to hear their thoughts on the property and to provide a loose estimate on what it would cost to get the property back up to scratch.”

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