How much should you pay at a mortgagee sale?

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You should not pay full price when you buy a property at a mortgagee sale. There are major differences that apply to these contracts and the price should reflect that.

The following factors apply to drive down the price that you should pay:

  • With a mortgagee sale you know that the property must be sold. In other sales if the seller thinks your offer is too low they can decline it and wait for a better offer. That is far less likely to happen at a mortgagee sale.
  • There is far less incentive on a mortgagee to get the very best price possible. Financially the mortgagee will be most concerned about making sure the price covers its costs and the debt. The mortgagee has to take reasonable steps to get a fair price, but usually the incentive is not as high as it is with the owner.
  • The mortgagee will have no emotional connection with the property or the sale price – it is a financial decision, not an emotional one.
  • The usual sale terms include warranties given by the seller about a number of matters – such as that the building laws have been complied with and that no notice has been given of planning matters that might affect the property. The mortgagee usually will not give those warranties.
  • It is normal for a mortgagee sale to be unconditional. The normal right to check the title, arrange finance, get a LIM or have a building inspection done is usually not allowed by the mortgagee – once the contract is signed you are committed to the purchase.
  • Often the mortgagee does not guarantee vacant possession. You may be forced to pay for the property and then be faced with the problem of getting the previous owner to move out.
  • Owners who are not happy about the fact that the property is being sold out from under them have been known to maliciously damage the property.
  • With a normal sale the risk in the property passes when the money is paid. If the property is damaged after the agreement is signed and before settlement that is the seller’s problem. But with a mortgagee sale risk often passes when the agreement is signed. Therefore you need to insure the property when the agreement is signed because if damage occurs after that date it will be your problem.

These are general comments and each sale is different. It’s important to look very carefully at the sale terms if you are considering buying land from a mortgagee.