Mortgagee Sales in Australia: Why the Banks Won't Simply Sell You a Property Cheap

Is Mortgagee Sales Automatically a Good Deal?

In Australia, a mortgagee exercising its power of sale has obligations concerning how the property is sold. For a Victorian mortgagee sale, the applicable duties depend on the circumstances, including whether the sale involves corporate property.

For example, section 420A of the Corporations Act 2001 can require a controller selling company property to take all reasonable care to sell it for market value or, where there is no market value, the best price reasonably obtainable.

Other mortgagee duties arise under property law and equitable principles.

The important distinction is that the mortgagee is generally required to take reasonable care in the sale process. It is not guaranteeing a particular sale price, and a sale below a previous valuation does not automatically establish a breach.

What this means for buyers of Mortgagee Sale Properties

Imagine a property worth $1 million, and the borrower owes the bank only $600,000. Some buyers believe the bank might happily accept $650,000 because that would recover its loan. That might be how it is done in some countries, but that's generally not how a properly conducted mortgagee sale works in Australia.

In Australia, the mortgagee cannot simply disregard its obligations to the borrower and other interested parties because its own debt would be repaid. It must take appropriate steps to achieve a proper sale outcome. Those steps might include obtaining valuations, engaging an agent, conducting a marketing campaign and considering available offers.

Consequently, the amount owed to the bank is not necessarily a useful guide to the property's selling price.

But mortgagee properties can still sell cheaply

But they are more often than not, cheap for other reasons, not simply because it is a mortgagee property. These are some circumstances where mortgagee sales achieve prices below those of apparently comparable properties.

For example:

• The property has serious structural defects or requires extensive repairs.

• There are title, planning, access or occupancy complications.

• The property is poorly presented or has restricted inspection access.

• The mortgagee needs to complete the sale within a reasonable timeframe.

• Buyers require compensation for unusual contractual risks.

But here's the crucial distinction:

A property selling below the price of a comparable property is not necessarily selling below its own market value. Even without the "mortgagee in possession" label, any properties with any/multiple of the above problems would usually be sold at a discount too. And these problems could be the reasons why the mortgagee on the properties are neglected and left to be repossessed.

A $700,000 apartment with substantial building liabilities may be worth $700,000—or less—even when a seemingly similar apartment without those liabilities is worth $1 million.

Sometimes, the details are buried somewhere obvious, but not so obvious. A low price is just the market pricing in risk.

And that's precisely what happened in our $700k 3 bedroom Hawthorn East apartment investigation: the low asking price prompted interest, but the documentation revealed reasons for caution. It does not, by itself, prove why the vendor set that price. We investigated this Melbourne 3 bedroom mortgagee sale apartment with 107 historical building defects. Read why we decided not to buy it.

Conclusion

Mortgagee sales are not inherently bad purchases. But they're not inherently bargains either. A mortgagee generally has obligations concerning the sale price and process. The fact that a lender wants to recover its debt doesn't mean it can simply dispose of the property at any price.

When a mortgagee sale appears unusually cheap, buyers should ask why. Is it genuinely undervalued? Or are there problems that other buyers have already identified and priced into their offers?

At Concierge Buyers Advocates, we approach mortgagee sales the same way we approach every other purchase: independent valuation, comprehensive due diligence and a clear understanding of risk.

The opportunity isn't buying below the previous owner's mortgage. It's buying below the property's true risk-adjusted market value.