Buying distressed sales

Introduction

The term ‘distressed sale’ is beginning to be used more often in the property industry, and is becoming common currency for pundits and commentators alike to refer to. But how many of us know what it actually means? And how should you go about making sure you can get hold of one with buying the wrong property for the wrong price?

There is little doubt the global credit crunch has hit the overseas property industry hard. Developers in many countries find themselves in the position of having built projects which now have no buyers or the people who bought off-plan are now trying to pull out and recoup their deposits. At the same time, owners looking to sell are increasingly twitchy about moving their properties off the market and banks have large numbers of repossessed housing stock effectively sat on their balance sheets when what they really need is liquid cash sitting in the coffers.

All of this adds up to something that British buyers love more than almost anything else – the opportunity for a bargain.

Buying at auction

This could be seen as the most common way to get hold of a property that has been repossessed by a mortgage lender, one which has been left in a Will to be disposed of, or one which has been stuck on the market for some time and a ‘motivated’ seller is keen to sell on. It is also a method to which many British buyers are drawn as there is some familiarity with the UK system of property auction which acts as reassurance.

Auctions are also sometimes used by developers to sell the last remaining stock they have on a particular project so that they can finish up and move onto new developments.

However, there are a few things to look out for with property auctions overseas. Make sure that you do plenty of research into the properties before the auction date. You need to make yourself very familiar with the locations, conditions, local areas and type of community where each property is situated. This could prove to be a very expensive task to undertake in a foreign country, the cost of which could outweigh the potential price saving you are making by buying at auction. For this reason many auction-goers are tempted to cut corners and buy properties sight-unseen and at time with little idea of what they are getting.

The fact that buying overseas also usually means buying in a foreign language, there are other factors to consider, as highlighted by John Howell, senior partner at The International Law Partnership. “Unless you speak the language well you will need to appoint your lawyer or some other person to bid on your behalf and you will need to pay your lawyer to check out each property you are thinking of buying.”

With the cost of doing this, and carrying out your research thoroughly, your ‘bargain’ could start to look more and more expensive.

That is not to say that buying distressed property at auction cannot be a great place for Brits looking for bargains overseas, but you do need to be careful. Try to stick to properties on developments that you already know, from companies you know have a good reputation in the market for quality and looking after their projects once they have finished building. Instead of looking at auctions as a way of finding a cheap property, you may find it safer to use them as a way to find the property you wanted anyway, but at a reduced price.

Buying from a bank

Banks come into possession of a property either when individual buyers default on their mortgages and there is no other choice but to repossess the property, or when developers are unable to keep up payments on other loans and the bank is again forced to step in.

The advantage of buying form a bank is that you have the time to go and visit the property in the same way as you would with any other purchase, but the asking price should be significantly reduced. In fact, you may find the price is some 30 to 50 per cent less than comparable properties.

Banks often have a stock of property on their books – with the stock volume set to rise in the coming months and years – and are keen to offload them as quickly as possible. John Howell sees this as a particularly good option for buyers looking for a bargain. “Sometimes banks have their own property sales department and sometimes they will appoint a local agent to sell the properties on their behalf. Either way, this can be a source of property which it is well worth investigating. It will be possible to find the correct contacts on the internet but, failing that, a local lawyer or estate agent should be able to help.”

One of the agents selling this kind of property in Spain is Azure Property International. Director Geoffrey McClure says: “While the Spanish property market has been struggling, the availability of repossessions being sold by banks at debt in order to recapitalise means there are strong investment opportunities and capital gains to be secured by savvy buyers.”

Another advantage of buying repossession properties from a bank is that they are often on hand to supply mortgages to buyers in order to help the purchase go through. This is a win-win situation for both sides – the buyer is able to finance their property easily and conveniently, and the bank gets the property off its books and gains a new customer for the future.

Buying from an individual

This is where many people feel a little uneasy at trying to get a bargain from a seller who is growing desperate to sell because of mortgage arrears or the threat of repossession. ‘Motivated’ sellers can often offer the best bargains as they usually have some kind of deadline to consider as well as the costs of running the property itself. While some people are able to completely detach themselves from the personal element of this kind of transaction and treat it purely as a business deal, you may also like to remember that by purchasing the property you are helping out a seller by allowing them to move on.

Avoid the temptation to cut corners here in search of the best price – all relevant legal and survey paperwork must be completed, and you must not under-declared the value of the property and pay a portion of the price in cash in order to save the vendor on capital gains tax. In the end you will be the only loser in this and the practice is highly illegal.

John Howell says there are a couple of ways of finding these properties. “Sometimes these properties are advertised, quite openly as distressed sales and on other occasions, a good estate agent will be able to locate and sell properties by sniffing them out in the market place. One of my clients has just bought a property in the United States as a distressed sale, they paid $180,000 for a property with a valuation of over $300,000 and to make matters even better, they bought when the US Dollar stood at two to the Pound.”

Things to look out for

Although buying a distressed property from any of the sources listed above can lead to a bargain, there are a few things to make sure you look out for in order to be sure you are getting the property you want. For the most part, these are the same checks that you should be carrying out in any case, but in the excitement of chasing a potential bargain it is easy to be persuaded that you can cut a few corners.

One of the most important issues is to make sure you have all of the legal checks carried out by your own, independent lawyer. In many ways this is even more important when buying a distressed property as you need to know exactly what the past history of the property is and how this may affect your purchase and you ability to sell it on in the future. This doesn’t mean that all distressed properties have something to hide – in fact the majority will have clean title, but you need to know where you stand from the outset.

As mentioned previously, location is a hugely important factor in choosing your property overseas – distressed sale or not – so make sure you do your research. If you are offered a property at what seems like a very low price, it may not be just because the vendor needs to sell quickly. The low price of the property may also cover up the fact that it is not in a desirable location, or in an area where it is difficult to rent out, or that is difficult to get to. Make sure you check all location details as thoroughly as possible and don’t buy unless you know exactly where the property is.

Finally, it is worth taking extra care to make sure you have a proper survey carried out. If the vendor has had money worries for some time, it is possible that running repairs have not been carried out or have been done on the cheap. This goes equally for fundamental aspects like the condition of the roof and fabric of the property and also for the decorative state of the interior. You may need to spend some money on the property in order to bring it to the standards you need to be able to live comfortably or rent it out – in which case you need to factor these costs in to your final budget.

And finally…

Distressed sales can offer the opportunity for buyers to pick up the property overseas they have dreamed of for significantly less than the market valuation, but as with any purchase of overseas property it is necessary to make sure you make all of the appropriate checks before handing any money over.

For most people, the best advice is to use the prospect of distressed sales to get the property you wanted to buy anyway, but at a reduced price. Stray too far from that ideal in location, property size or type, and you may not be getting quite the bargain you hoped for.

Contacts
International Law Partnership - www.lawoverseas.com
Azure International - www.azureinternational.co.uk