What buyers need to know about purchasing a distressed property.

The unfortunate reality is that there has been an increase in the number of distressed property sales owing to the lockdown and a rising unemployment rate. While interest rate cuts provided a ‘massive stimulus’ to the market, demand has slowed as signs of consumer distress start filtering through.

“We’re going to see a lot of keenly-priced properties coming into play in the coming months, which makes getting your price right even more critical. Last year,  14% of our sales were due to emigration – and if we add the expected wave of distressed properties coming onto the market, this will drive prices down even further, as the buyer pool will not be able to sustain those levels,” says Lloyd Hobson, national sales manager of tech-enabled real estate agency, Leadhome.

Some of these properties will require a bit of work before they can be transformed into happily-ever-after homes, but they do provide cash-strapped buyers with the opportunity to enter the property market while rescuing the sellers from their debt.

“The misnomer is that it is not the house that is in distress but the homeowner,” clarifies Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa. He explains that distressed property sales refer to homes that have been put onto the market because the homeowner has fallen into some sort of financial peril and can no longer afford to keep up with his debt repayments.

“Sadly, in these trying financial times, we 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,” says Goslett.      

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

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 repayments. In these cases, homeowners may still reject offers they deem too low but are usually willing to accept offers to avoid having their property go to public auction. 

Sales in Execution / 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 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.

Foreclosure / 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. This can be incredibly traumatic for the sellers, which is why it is always advisable to be open with the bank from the very beginning if the homeowner is unable to keep up with their monthly instalments. Usually, the bank is then able to assist the homeowner before it reaches this stage.  

When considering these properties, Goslett advises buyers to set a purchasing 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,” he recommends.

“These kinds of transactions can be tricky if you do not have an experienced professional to guide you through the process. This is why we train our agents through the RE/MAX Certified Distressed Property Advisor (CDPA) program to learn how to deal with these delicate and highly emotionally-charged transactions. Knowing that the lockdown would negatively affect homeowners, we have completed nine CDPA online training sessions since the lockdown started.

“There are now 955 active Broker/Owners, Managers and Sales Associates who have become Certified Distressed Property Advisors within our network who are equipped to assist the seller in reducing their debt to zero – or as close to it as possible – by providing the best service within these challenging circumstances,” says Goslett.  

Article courtesy of Lexis Digest & Property24