Buying repossessed property: How does it work? Is it worth it?

Posted on:
8 Sep 2018
News, Property
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You may have been part of dinner table talk about the ‘great value’ that comes with buying repossessed residential property and you’re now tempted to get one for yourself. Here’s what you need to know: The benefits and the risks of the repossessed property path. These are largely drawn from views expressed by Adrian Goslett, regional director and CEO of RE/MAX Southern Africa.

Where does this property come from?

It mainly comes from financially squeezed bonded home owners. A homeowner who is no longer able to pay their bond amasses substantial arrears. This triggers the bank to take legal action against the defaulting homeowner.

The bank will serve the defaulting owner with a summons, taking judgment and eventually attaching the property.

Is it the same as buying property from sale of execution?

Not necessarily. If the homeowner is still in arrears by the time the property has been attached, the bank will instruct the sheriff of the court sell the property at a public auction.

A representative from the bank is entitled to attend the auction and purchase the home if the bidding amounts are not substantial enough to cover the outstanding balance owed to the bank. The home will become a repossessed property or property in possession once it has been bought back by the bank at the sale in execution.

How the bank deals

Once the bank has purchased the property at the auction, it becomes the legal registered owner of the property.

At this stage, one of two things are likely to happen. Either the bank will sell the property to recoup their losses, or in some cases, they may allow the previous owner to rent back the property from them on a month to month lease agreement.

If the bank decides to sell they will advertise the property for sale. Certain banks will also provide lists of repossessed properties to real estate companies for them to sell.

And then comes the buyer: What are the benefits?

There are several benefits to purchasing a repossessed home – especially if the amount owed to the bank is less than the home’s market value.

Banks are not looking to make a profit on the sale, but merely recoup their losses, so buyers could find themselves a bargain by purchasing one of these homes.

Another benefit is that because the bank is a VAT vendor, there is no transfer duty payable on a repossessed property. And the bank will need to ensure that the municipal accounts are up to date, so no need to worry about taking on someone else’s municipal debt.

And there are serious risks

Repossessed homes are often in poor condition and will require renovation.

Buyers will need to factor in the cost of the renovation on top of the purchase price to see whether they are really getting a bargain or buying a money trap.

Repossessed homes often come with tenants in the property. In many occasions these are previous owners of the property and it can be a challenge to remove them.

The new owner will be responsible for vacating them. It could be as simple as giving the occupants notice. It can also take legal action to remove them.

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