No one likes to hear that a person has lost their home because they couldn’t pay their mortgage, but it happens.

When it does, the home lender is entitled to sell the property to recoup its losses. While such sales can be advertised on the wider property market, they differ slightly from regular home sales.

Mortgagee in possession meaning

In the lending world, a ‘mortgagee’ – the bank or lender – lends money to a ‘mortgagor’ – the borrower. If the mortgagor defaults on their home loan, the mortgagee can take legal possession of the property and sell it in a bid to recoup the debt. When this happens, it’s known as a mortgagee in possession sale.

In real estate speak, these homes can sometimes be referred to as repossessed or foreclosed properties. Although the two terms have different legal definitions, in both cases it will be the lender who puts the property up for sale.

It’s worth noting here that a ‘distressed’ property sale is another thing entirely. It’s a home that’s being put up for sale by a borrower who may be struggling to meet their mortgage repayments and wants to sell the property that's in danger of being repossessed.

How to find mortgagee in possession properties for sale

Lenders generally don’t advertise mortgagee in possession sales themselves but, by law, they must make a genuine effort to sell the properties for the maximum possible price. If the price the property goes for is higher than the borrower’s debt and sale costs, the excess then goes to the borrower.

Many lenders use specialist real estate agents or have their own channels to put repossessed homes on the property market. Not all repossessed homes will be advertised as such, but there are a couple of resources listing mortgagee in possession sales across Australia, including:

If you’re interested in such properties, it’s worth contacting real estate agents in your region that specialise in mortgage in possession or repossession sales.

Are mortgagee in possession properties cheaper?

Like most property transactions, the ultimate price will depend on many variables – the home itself, its location and condition, and demand in the wider market. Some mortgagee in possession properties may sell for less than comparable properties while others may go for fair market value or above, particularly if there's considerable buyer interest.

By law, lenders are obliged to get the best possible price for a repossessed home, although it’s up to them how they achieve this. A lender will generally appoint a real estate agent and a suitable reserve price may be set for the property based on their advice. The lender is also required to undertake an adequate marketing campaign.

However, the lender’s primary aim is to recoup the amount owing on the defaulted home loan plus any reasonable costs incurred in taking possession and selling the property. Many lenders will likely be more interested in securing a timely sale than in making the property presentable or marketable.

Should I buy a mortgagee in possession home?

As a potential buyer of a repossessed home, it’s worth remember that just because something's ‘cheap’, may not mean it’s a bargain.

If the previous homeowners were unable to meet their mortgage repayments, it’s likely they were unable to meet other home-related expenses as well, like maintenance, repairs, and utilities. Mortgagee in possession, or repossessed properties, are typically sold ‘as is’. They may need cleaning up, maintenance, repairs, or services reconnected – all costs that need to be taken into account on top of the sale price.

See also: Crucial things to check when buying a house

Given lenders are keen for a timely sale, sometimes the settlement process can be quick. But it’s worth noting a repossessed home may bring extra conveyancing complexities, particularly if it’s tied up in separate bankruptcy proceedings. Such complications may lead to settlement delays as well as more expensive bills from conveyancers or lawyers.

How do mortgagee in possession sales differ from standard sales?

There may be less time and opportunity to inspect mortgage in possession properties, or at least to conduct thorough investigation of potential issues such as structural or compliance problems.

Because the home is listed by the lender and not the owner, the seller may not be across all the information on the property and thus mightn’t be required to disclose certain issues. It’s highly advisable to conduct your own inspections and thoroughly research the property before you sign a contract of sale.

As well as there generally being no negotiation on price, sale contracts on mortgage in possession properties are not the same as standard sale contracts. They're often subject to a number of ‘special conditions’, effectively stating the buyer is purchasing the property ‘as is’ with all known faults and defects and no right of recourse against the seller. It's extremely difficult to back out of a mortgagee in possession contract once you've entered one.

Mortgagee in possession sales: pros and cons

Let’s weigh up the potential benefits and risks of mortgagee in possession sales.

Pros

  • Price
    Some mortgagee in possession properties can sell for below the price of other comparable properties on the market. Lenders tend to be more concerned with recouping the debt than making a profit.

  • Inspection opportunity
    Potential homebuyers will generally be able to inspect and conduct formal specialist inspections (e.g. building and pest) although there may be a limited window to do so.

  • Quick sale
    Because lenders are generally keen for a timely sale, buyers can take possession of a property relatively quickly.

  • Ready for occupancy
    Mortgagee in possession homes are offered as vacant possession which means the previous owner, or any tenants, have been previously moved from the property.

  • Attractive to investors
    Lower purchase prices can present the opportunity for better rental yields for landlords. Investors can also claim the cost of any repairs and improvements on tax, as well as depreciation on fittings and fixtures.

See also: What tax deductions can you claim on your rental property?

Cons

  • May need work
    Many mortgagee in possession properties are not sold in mint condition and may need considerable work to get them fit for occupancy. Sometimes related costs can blow out, negating the benefit of a lower sale price.

  • No negotiation on price
    The lender will have a fixed figure they need to achieve in the sale and generally do not entertain any discussion on price.

  • Restrictive contract conditions
    A mortgage in possession sale contract generally comes with special conditions that see the buyer agree to purchase the property as is, without recourse for any faults or defects and with few grounds to terminate the contract.

  • Potential for more complex sale process
    While the seller may be keen for a quick sale, if the property title is tied up in other matters, such as bankruptcy proceedings, the conveyancing process can be more complex, leading to delays.

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