Olly Newland: Mortgage nightmare

A mortgagee sale is the lender's last resort and a deal can still be struck. Photo / Paul Estcourt

The words mortgagee sale can strike terror into the heart of any property owner. A mortgagee sale can destroy families, businesses and lives.

Over the past year, more property owners in financial difficulty have faced the loss of their home or investment to pay off the lender.

Now, with the "worst recession in 70 years" sapping the economies of the world, the lesson has to be learned again: what goes up must go down.

In March, forced home sales hit a 15-year record of 201 properties, according to Terralink, which added this "worrying trend" showed "there were still a lot of distressed owners throughout the country".

A mortgagee sale is the highly visible end-game of a long process. I estimate for every mortgagee sale advertised, at least another 50 property owners are in distress but manage to sell, refinance or come to some arrangement before the hammer falls.

Property owners should understand that even if they have a mortgage on a property, they still own 100 per cent of that property. The mortgagee (lender/bank) has lent you money using the property as security.

This means that even should you miss a payment or two, the lender cannot just knock on the door and repossess your property.

Before any action can be taken, the lender must send you a properly drafted Property Law or Default Notice, setting out the arrears - including any penalties - and giving you a fixed period to catch up.

If you can pay the amount due, that is the end of the matter.

If you cannot pay, it is imperative you immediately talk to the lender, preferably using a consultant or lawyer. In most cases a deal can be worked out provided the process is started early enough.

The last thing the lender wants is to take over your home or investment. In fact, coming into what the Americans call "bank-owned property" is one of their nightmares and is therefore your strongest argument. Most lenders will be happy to give you a few months' relief if you can show you will be able to catch up and carry on paying.

But if you find that continuing payments is impossible, selling is likely to be your only option. Realistically, most lenders would rather you organised the sale on the best terms possible rather than have them do it for you. If you sell, the lender can only be paid what you owe them at the time. Any surplus is yours to keep.

As the statistics show, some people just can't stand the pressure and stress so allow the mortgagee sale process to continue. This takes some time, especially as, by law, the sale must be done openly, usually by auction.

During the auction period you can still sell the property so long as you receive sufficient time to clear your debt to the lender. Alternately, if you find a generous aunt who will give/lend you the money, that may allow you to put off the sale process, perhaps permanently. And remember that you can stop the auction right up to the last minute by paying all that you owe or making a deal.

Meanwhile, if you want to be a buyer and haunt the mortgagee sale market looking for a bargain, you must inspect the property.

One frequent problem is that you will likely find some resistance from the soon-to-be-dispossessed home owner. A common tactic employed by irate owners is to prevent access to the property during the sale process. Would-be buyers are less likely to bid at an auction if they have been unable to inspect the interior.

A strong pair of binoculars, a ladder and a zoom-lens camera can be set up in the garden of a willing neighbour, and with patience you will probably be able to get all necessary information you need. Also check online for an earlier listing of the property, which may include photos or a virtual tour.

A word of caution: even if you succeed in buying the property, you may face problems getting the ex-owners out. Put this down to being just another hazard of the business.

While a tragedy for the owners, mortgagee sales can be a bonanza for bargain hunters.

Ironically, these sales have become so popular with the bargain hunters that prices are frequently not bargains at all. The demand for them drives up the prices.

* Olly Newland is a property investor and author. Email your property questions to omn@ollynewland.co.nz.

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