With increasing inflation and interest rates, property repossessions are forecasted to increase by up to 50% this summer. As with every economic shock, investors are set to cash in, and the next few months are no different with opportunities to purchase residential properties at a reduced price creating options for renovation, flips or simply increasing profit margins.
As Finbri Bridging Finance explains, “With recent rate hikes, the tide has turned after a long period of cheap borrowing in the UK. We’re in uncharted waters and it’s likely that there’ll be many homes repossessed before the summer’s over. Whilst this is an unfortunate and distressing situation to be in for borrowers in arrears, it does present an opportunity for property investors to purchase a property for up to 20-30% below market value.”
This guide explains how to buy a repossession, find bargain properties, use the top auction houses, and more.
What is a repossessed property?
A repossessed property is a property that a lender has seized due to mortgage arrears. If the borrower is in mortgage arrears, the mortgage lender will want the borrower to clear the missed payments. As a mortgage is a loan secured against a property, the lender (who is usually the 1st charge holder) has the ability to repossess the property to reclaim what’s owed. If the borrower doesn’t settle the debt, the mortgage lender will start court action. This is called possession action and could lead to the borrower losing their home through the process called repossession.
Where can I purchase a repossessed property?
Lenders typically sell repossessed properties through one of two methods: through an estate agent or an auction. Mortgage lenders usually want to recoup their losses as soon as possible, and auction purchases can be completed in less than a month. Be aware that purchasing a property at auction differs from purchasing through an estate agent.
Buying a repossessed property via auctionWhen purchasing at auction, the successful bidder must exchange contracts on the day of the auction and then usually has to complete the purchase within 28 days, so you’ll need to have funds available to pay 10% of the price on the day and the rest within the 28 days. Know all about the auction purchases can be completed in less than a month.
If you’re buying with a mortgage, you should research your options beforehand and have an agreement in principle secured before you start looking at properties. Obtaining a mortgage on a repossessed property is no different than getting a mortgage on any other property.
You must also ensure that your mortgage lender can process your application within 28 days to have the funds you need to complete or take out a bridging loan as an interim measure, which is more expensive in the short term but quicker and easier to arrange.
Buying a repossessed property via estate agents
Mortgage lenders may also sell repossessed properties through estate agents. Repossessed properties are not always easy to spot when sold by estate agents. When reviewing property details, look for signs that the property is empty, in poor condition, has limited information in the description, and is on offer for less than you would expect.
Buying through an estate agent is riskier because you could be gazumped at any time (when someone else makes a higher offer that is accepted – unless you’re buying in Scotland), resulting in a loss of any money you’ve already spent. Because the lender must obtain the highest possible price for the property, the estate agent will usually continue to market it and will also place a ‘notice of offer’ in the newspaper to invite other people to bid higher.
Is it always cheaper to buy a repossessed house?
It’s not uncommon for repossessed properties to sell for 20-30% less than their market value; however, there is no guarantee that this will be the case. Under normal circumstances, a lender’s approach to selling a repossessed property is very different from an owner’s.
While a lender is legally required to continue serving the owner’s interests by obtaining the best possible price for the property, in reality, they will want to sell as soon as possible.
In this regard, a lender is unlikely to incur any additional costs and, as a result, will take minimal action in preparing the property for sale. This, in turn, may affect the resale value and provide the opportunity to purchase repossessed houses from banks (or other lenders) for much less than would typically be the case.
What are the consequences of purchasing a repossessed property?
Aside from the financial benefits of a purchase, there may be several issues with purchasing a repossessed house without proper research and advice, including:
- The property is in poor condition.
- Repossession of buy-to-let properties
- Having funding in place Possibility of gazumping
- Unexpected hidden expenses
- The property is in poor condition.
It’s important to understand that repossessed properties may not have received the same level of care when the previous owner vacated as you would expect in a traditional house sale.
It’s not uncommon to discover that many fixtures and fittings have been removed or damaged before you get the keys. This is why, if possible, viewing the property before making a bid is critical so you can factor in any additional budget for unexpected renovation costs.
Repossession of buy-to-let properties
If a buy-to-let landlord owned the repossessed property, you must determine whether or not the current tenants handed over the keys and vacated. If they have not moved out, you may face delays and difficulties if they seek legal permission to remain on the property.
Before the repossessed property is for sale, the mortgage lender and the previous owner should have resolved any issues. However, you must clarify this position before proceeding with any purchase.
Having funding in place
It’s a good idea to have a mortgage agreement in principle before you start looking for a property, especially if you plan to buy a repossession through an auction.
One advantage of purchasing a repossessed house at auction rather than through an estate agent is that once the hammer falls, both parties are committed to the sale. However, as the buyer, you are typically expected to exchange immediately and complete the sale within 28 days, meaning your finance must be in place before the transaction.
One of three types of financing options are typically used when buying from auction and these are using savings, a traditional mortgage or bridging finance. Bridging finance is a popular type of finance often preferred by property investors due to the speed and ease with which it can be arranged.
Possibility of gazumping
Gazumping, not to be confused with gazundering, occurs when another party makes a higher offer on a property you are in the process of purchasing, and that offer is accepted, thereby forcing you out of the transaction and losing the money you’ve spent on surveys, or paid to your conveyancer for local searches.
Gazumping can occur at any time before contract exchange. In most cases, this happens because a higher offer is made, and the seller wishes to maximise the amount they receive from the property.
As a lender is legally required to obtain the highest possible sale price for a repossessed property, gazumping can occur during the purchasing process from an estate agent. Technically, this could also happen when purchasing repossession properties at auction. However, this is less likely as if either party pulls out of a sale; the party breaking the contract can incur penalties.
Unexpected hidden expenses
When a property is repossessed, it is likely that some, if not all, utility services have been disconnected and must be reinstated. It is also critical that a complete structural survey be performed on the property to ensure that no hidden defects exist that may have prevented the previous owner from selling.
Remember that the previous owner will not be available to walk you through any potential flaws or issues, such as disagreements with neighbours over shared parking access. It’s best to have everything checked out ahead of time.
