Mortgagee-in-possession sales explained

What is a mortgagee in possession?

If a borrower can't repay their mortgage then their lender can take legal possession of the property and sell it. This is known as a mortgagee-in-possession sale.

It's a lender's last resort to recover a mortgage debt. For a homeowner facing mortgage default, a mortgagee-in-possession sale means losing your home. For potential buyers, a mortgagee-in-possession sale may represent an opportunity to purchase a property at a reasonable price.

Where do I find mortgagee-in-possession properties for sale?

Lenders don't usually advertise mortgagee-in-possession sales. However, you can contact local real estate agents or buyer's agents who may have the resources to track down mortgagee-in-possession properties on the market.

There are several websites listing forced sales, including:

• Trovit
• ForcedSale.com.au
• Mitula

The mortgagee-in-possession process

If you fail to meet your mortgage repayments as outlined by the mortgage contract, the mortgagee will typically issue a notice identifying that you are in default of the loan, and that you have a certain amount of time to resolve the situation.

There are several notice requirements that need to be issued by the mortgagee, ending ultimately with the lender applying to a court to seek orders for you to vacate the property and organise a sale.

Learn more about what happens when you can't repay your mortgage

How will the mortgaged property be sold?

By law, the lender must make a genuine effort to sell the property for the maximum possible amount. They have to advertise the sale, get independent valuations and decide whether to sell privately or at auction. The proceeds of the sale will be used to absorb any legal, administrative and holding costs incurred by the mortgagee in maintaining the property.

How can I avoid the mortgagee taking possession?

If you feel at risk of having your property taken over by the mortgagee and you’re struggling to meet your repayments due to a change in personal circumstances, or for any other reason, you should contact your lender as soon as possible to discuss your options.

Your options may include:

• Asking for a temporary "repayment holiday" to help you get back on your feet.
• You may need to refinance to consolidate several debts into a single, more manageable debt.
• Selling the property to cover your debts before the lender forces the sale.

You can also read our guide on mortgage stress to get some tips on getting your mortgage repayments under control.

Are mortgagee sales a genuine bargain for buyers?

The conventional wisdom suggests that mortgagee-in-possession, or "forced" sales are generally bargains because the lender is anxious to get rid of the property and recover their debts as fast as possible.

This is somewhat true, but the lender has a legal obligation to sell the property at the highest possible value. The lender will appoint an experienced real estate agent and a reserve will be set based on advice from the agent. The mortgagee is required to execute an adequate marketing campaign for the property so that they achieve the best sales result.

While you might find a mortgagee-in-possession property at a decent price it also depends on many other factors including the quality of the property itself, the location and market conditions.

What should buyers watch out for?

When buying a mortgagee-in-possession property you should get legal advice and have a solicitor review the contract terms, particularly any non-standard clauses which may represent a risk. These may include; the buyer's acceptance of the property in its existing condition; no warranties; no disclosure of hazardous substances; no disclosure of structural defects, and many others.

It’s also a good idea to get an independent valuation of the property to identify any hazardous materials or structural defects, and determine whether the property comes with unexpected costs such as unpaid council rates or strata fees.

As an investor, you should focus on the quality of the property itself as well as location considerations such as nearby infrastructure projects, transport hubs or schools. Consider all the other factors you would in buying any investment property, such as rental yields, property maintenance costs and future growth potential.

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Frequently asked questions

• What happens if I fail to vacate my property upon request from the lender?

  If you don’t vacate the property in accordance with Court Orders, the local Sheriff's office may intervene to remove occupants from the property.

• What if my lender is unwilling to renegotiate my mortgage terms

  If you feel that you’re at risk of having your property possessed by the lender, you should contact them directly to see if you can renegotiate your mortgage terms. However, if they are unwilling to cooperate, you may want to consider refinancing your mortgage to another lender with more favourable terms, such as more competitive interest rates or the ability to take a repayment holiday where required.

• How long does it take for the lender to recover a defaulting borrower’s property?

  The entire process can take 6-12 months, or even longer.

• What happens if the property sells for less than what the borrower owes?

  The repossession process is highly expensive for the mortgagee, particularly if it doesn’t have insurance for that particular mortgage and if the property sells for less than the amount which the borrower owes. This is why the mortgagee may reflect these costs through higher fees.

  Homeowners who own a property which is sold for less than what is owed will see lenders activate their mortgage insurance policy, covering them from the shortfall. The home owner would then need to pay back the mortgage insurer.

Written by

Richard Whitten

Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

Richard's expertise

Richard has written 530 Finder guides across topics including:

• Home loans
• Property
• Personal finance
• Money-saving tips