When somebody with a mortgage doesn’t keep up repayments on their mortgage, they will be in breach of the agreement that they entered into with their lender. The lender, to recover the money that they have lent to the borrower, can insist that the property is sold. The process of the lender taking full control of the property with a view to selling it is commonly known as ‘repossessing’ the property. Properties that have been so ‘repossessed’ by the lender are commonly known as ‘repossessions’ or more colloquially by some people as ‘repos’. So how does a repo happen and are they the bargains that some people think?
To repossess a property, the lender must first get a court order allowing them to do this. They then will, if necessary, evict the owner from the property and secure the property. The property is then marketed and sold by the lender. After the amount of the loan, missed mortgage payments, fees for missed payments and the lender’s fees for repossessing and selling the property have been deducted, any amount that is left over is then paid back to the borrower. The lender is under an obligation to get the best possible sale price for the property in the circumstances. Sometimes, however, the lender will not even recover the amount that they have lent on the property. This is particularly likely in times such as those at the time of writing where property prices have fallen quite drastically after a property boom during which many lenders were lending to high-risk borrowers and often with very high LTV ratios: in other words, with little, and in some cases no, deposit being obtained from the borrower.
Repossessions are more common in times of generally high-interest rates, high unemployment and poor economy. These increasing interest rates make the mortgage payments for many borrowers increasingly high and as a result, they start missing payments. This combined with people losing their income and livelihood lead to high levels of repossessions. Governments recently have intervened to prevent people from losing their homes, even when they are considerably behind with their mortgage payments, and it is a moot point as to whether this strategy will work by allowing people to ride-out the tough times and get back on track financially in the longer term or whether it will simply increase the level of indebtedness. It is said that lenders generally don’t want to be property owners and are not keen to repossess properties unnecessarily anyway. This is particularly so where the property is worth less than the amount that has been borrowed. In that case, the longer the lender is asked to wait before repossessing and selling the property, the less the lender will recover as they effectively subsidise people to stay in their properties who are paying partial, or no, interest to the lender.
There is a general perception that buying a repossession is a quick route to making money in the property market and that ‘repos’ represent great value for money or even a ‘bargain’. The reality is that repossessions don’t appear to the mass market and it’s not as straightforward to purchase a repossessed property as it is to purchase a property that is being sold by a private owner. As a result, if you are prepared to:
- accept the conditions of the lender, and their solicitors, that the property is effectively sold as seen;
- deal with solicitors acting for the lender who are usually working on such low fees that they won’t return calls, emails or letters for several days at a time, sometimes leading to the collapse or late settlement of the purchase;
- are prepared to jump through hoops to view the property during daylight hours because there is no electricity in the property to operate the lights;
- are prepared to deal with the risks that you might not end up moving into the property when you originally planned due to such risks as the repossession being pulled off the market even after you have had an offer accepted on it because there was a problem with the paperwork in the original eviction proceedings; and
- you are in a financial position that you are able to settle the transaction within just a few weeks of making your offer
then a repossession can represent a good buy. For these reasons they perhaps do sell for a little bit less than what a property without these issues would sell for. This is simply because there is less of a market of buyers who are prepared to put up with these headaches than for most privately-owned properties.
However, the perception that they represent bargains simply should not be true. Any estate agent who is selling them in this way is not doing their job properly. The lender and, by extension, their appointed estate agent have an obligation to get the best price they possibly can for the property. Obviously, there are drawbacks to marketing a repossession for sale but the price that is fetched should be the true market value taking those issues into consideration. There is, therefore, no question that a ‘repo’ should be an opportunity to buy a property ‘below market value’ as many people perceive. The only way that this is the case is where the estate agent is not doing their job or where they are representing the property as being a bargain in the hope of attracting a buyer for the property.