As mortgage interest rates remain high, more homeowners are struggling financially. While a repossession is a last resort for lenders, the number of them is increasing and the trend looks likely to continue. However, it is an ill wind which blows nobody any good. If your own finances are sound, buying a repossessed property could be an opportunity, as typically, these properties are significantly cheaper to buy than ones sold by their owners.
‘Buying a property from a mortgagee in possession or a receiver can be a good way of picking up a bargain,’ agrees Steven Douglas a solicitor in the residential property team with Richard Reed Solicitors. ‘However, it is not for everyone and there are additional issues you will need to consider.’
Here Steve answers some key questions about buying a repossessed property.
What is a mortgagee in possession?
When someone takes out a mortgage, their lender will take a charge over the property as security for the loan. This gives the lender the right to manage and sell the property to ensure the debt is paid off if the borrower is unable to make the repayments. A ‘mortgagee in possession’ is a lender who has taken over the control and management of the mortgaged property from the borrower.
What is a receiver?
Instead of taking control of the property directly, a lender may appoint a receiver to manage the mortgaged property to protect its security. Under the general law, a receiver’s powers are more limited than those of a mortgagee in possession. However, most mortgage deeds extend the receiver’s powers. In practice, there is often very little difference between them. For example, most mortgage deeds give the receiver power to sell the property.
Legally, a receiver acts as the borrower’s agent. Lenders often prefer to appoint a receiver rather than selling as a mortgagee because this approach limits their own liability.
Does it matter if the sale is by a receiver or the mortgagee?
From a buyer’s perspective, it should make little difference in practice. However, it is important to instruct a solicitor who is experienced in this type of transaction.
Your solicitor will need to be certain the seller has the right to sell the property. They must also ensure the property is released from the borrower’s mortgage and any other charges. The mechanism for this depends on whether the seller is a receiver or the mortgagee, so it is important to understand fully the legal rules which apply in each case.
What are the main differences from a conventional purchase?
Unlike an owner-occupier, the seller is unlikely to have personal knowledge of the property. As a result, they will not usually provide replies to pre-contract enquiries, or their replies will be very limited. Therefore, there is a greater risk of issues with the property that are not apparent. This applies to both the physical state of the property, and the legal aspects of ownership.
It is also unlikely the seller will give any form of title guarantee. This means you may not have any recourse against them if there is a problem with the property’s title, or if you later discover it is subject to a charge you did not know about.
Where the sale is by a receiver, they will usually be acting as the agent of the owner/borrower. The receiver will sign the sales contract, but the owner/borrower will also need to sign the transfer deed to pass title. However, they may have little incentive to do so, meaning delays or issues can arise with completion.
How can I reduce the risks associated with buying from a mortgagee or receiver?
Buying a repossessed property is different from a conventional purchase, but your conveyancer will help you address and mitigate the risks. For example, they may suggest more in-depth searches, or more numerous and thorough inspections and surveys. They will also ensure the receiver or mortgagee has power to sell the property, which will depend upon the relevant legislation and terms of the mortgage deed.
A good solicitor will anticipate certain issues and suggest measures to pre-empt them. For example, if the owner/borrower will not execute the transfer, the lender can do so, relying on its statutory powers of overreaching. If the correct procedure is used, this will not only transfer the title, it will also release the property from the mortgage and any other charges, such as a second mortgage. Lenders sometimes resist this because it can expose them to a slight additional risk, so it is important to have someone on your side who is used to negotiating and drafting these transactions.
What else should I know when buying from a mortgagee or receiver?
Buying a repossessed property can be competitive, and getting your offer accepted can be your first hurdle. Showing you have your finances in place and an experienced solicitor on board will boost your chances.
Another thing mortgagee or receivership sales have in common is the need to act quickly. The lender’s primary concern is realising their security. They are also under a duty to get the best price they reasonably can and if there are delays on your part, or another buyer makes a better offer, you may find yourself in a contract race or even losing the property. To be successful in these types of transaction, it is imperative to have a solicitor who is proactive and who understands the overlap between insolvency law and property law.
How we can help
We have extensive experience of acting in all types of property transactions, including repossessions. For further information, please contact our residential property team on 0191 567 0465 or email: [email protected]