Purchasing a Mortgage Re-possession at Auction

Potential Problems and Pitfalls

Purchasing a re-possessed property can seem like a good way of acquiring a cut price property for investment or for occupation. Without the right advice, however, these “bargains” can often have defects that potentially take many years and tens of thousands of pounds to put right, or in the worst case you could be left with a property that is virtually worthless.

Unlike a normal purchase where there is a pre-contract stage to give you time to check the contract, make searches and arrange your finances, if you bid successfully at auction there is an immediate binding contract and you buy the property “warts and all” subject to any legal problems or defects in the property.

The key questions to consider are:

• Who is selling the property?

It will very often be the mortgage company exercising its power of sale under the mortgage and as such the mortgage company will not be the registered owner of the property. It is accordingly necessary to consider whether the power of sale has arisen (which will require examination of the original Mortgage Deed) and an examination of the title to discover whether the mortgage was a first or second charge over the property. If the mortgage company selling only has a second charge then it is sometimes necessary to enquire as to whether the purchase price achievable will cover the first mortgage, failing which the holder of the first mortgage may refuse to discharge that mortgage. Auction sale packs should at the very least contain an acknowledgement by the mortgage companies that they will discharge their mortgages and leave you as a purchaser with clear title to the property, as the last thing you will want is to buy a property with an existing mortgage.

• What is the status of the current legal owner?

If the owner is bankrupt, there may be bankruptcy notices against the property requiring that no transfer of the property be registered without the consent of the legal owner’s Trustee in Bankruptcy. Again, the auction particulars should given an indication as to how this problem will be overcome.

• What title guarantee is being offered?

Very often a mortgage lender will sell a property under its power of sale with no title guarantee whatsoever. This means that you will have no comeback against the mortgage lender if it subsequently turns out that they were not entitled to sell the property. This makes it crucial to have a full legal examination of the title and the Mortgage documentation.

• Who owns the contents of the property?

These may still belong to the legal owner of the property, who may not have taken steps to remove them. They can also be owned by a Trustee in Bankruptcy if the legal owner is bankrupt.   You cannot assume that merely because the contents have not been removed that they belong to the mortgage company.   The safest course of action is to assume that nothing of any value has been left in the property on purpose and any items that are there must be considered to be “on loan” until such time as they are collected, with the added obligation that you may be required to repair or replace any items that become damaged or cease to function.   The law assumes that after a reasonable period of time has passed, the items are treated as having been abandoned by the owner, however the length of time that is “reasonable” will depend to a large extent on the value of the item and the ease by which it can be removed from the property if required.

• What is the physical condition of the property?

Some borrowers with mortgage arrears are unlikely to have paid out the necessary sums for upkeep of the property and, indeed, the property may be in such a poor state and condition that the only option was for the property to go to auction rather than be placed on the general market. Nothing short of a full structural survey will suffice and you should ensure that your surveyor reports to you on the likely value of the property to avoid you paying excessively at auction. You should also have the electricity and gas wiring, cabling and piping checked by an appropriately qualified person.

• Plans – Do the plans include the whole of the property you think you are buying?

 They should be checked on site.

• Is the property freehold or leasehold?

If the property is leasehold, you will need to ensure that you have read through all of the obligations (covenants) on the part of the tenants contained in the lease to ensure that they have all been complied with. If you purchase a leasehold property and there is an existing breach of covenant then you could be liable to have the property forfeit by the landlord for that breach of covenant and you cannot always be guaranteed to have the sympathy of the court in applying for relief from forfeiture. The most common reasons for forfeiture are unauthorised alterations (look out for signs of any work recently carried out to the property), lack of repair (this is where your survey report becomes increasingly important), rent arrears and service charge arrears. Usually when purchasing a leasehold property you would be provided with a clear ground rent and service charge receipt from the landlord or the landlord’s agents, however this cannot be guaranteed to be forthcoming from the mortgage lender and therefore you must be prepared to make your own enquiries. You must also be prepared to ask questions of the owners of any surrounding property owned by that landlord to try to identify any potential problems that exist with the Landlord.

• Have you inspected the property?

In a usual sale by private contract, you will have the opportunity of asking the Seller various questions in relation to the property. Your solicitor will also ask a number of questions on your behalf. Some of the key enquiries raised relate to any rights which any other person may have over the property that are not disclosed in the title deeds. As you will not have the benefit of asking these questions (it is very unlikely that the defaulting borrower will be persuaded to answer them), you must make your own inspections. You must inspect the property for signs that anyone else uses the property, including pathways and any pipework and cabling underneath, over or through the property and you should make enquiries of the gas, electricity, telephone and water companies to try to identify whether their records show any pipes etc. going across the land.  Your solicitor can assist with this if required. You should also consider the access to the property and whether it crosses anybody else’s land and may require their permission. You will also need to enquire and inspect to see if there are any current occupiers of the property. The property should be vacant. As with all properties purchased, it is a good idea to inspect the property at different times of day and night both on weekdays and at weekends to get as full a picture as possible of the property being purchased, surrounding properties and the area in general.

• Have you carried out the appropriate searches?

The mortgage lender may have provided you with the result of a local search which they commissioned in respect of the property. This will be a search of the local authority’s records, however it is unlikely to be an “official” search and is most likely to be a search carried out through a search agency. In our experience search results produced by search agencies tend to be less accurate than official searches and we would always advise commissioning a local search yourself. Local Authorities’ records can reveal a lot of information about a property, including its planning history and any existing action that the local authority is taking in relation to the property (e.g. existing compulsory purchase orders).   You should also carry out a water and drainage search if one has not been commissioned by the mortgage lender and make further enquiries if you do not like the results. A useful tool is also an environmental search, which may reveal historic land uses that may contribute to subsidence or environmental contamination of the property, both of which will blight the property in the eyes of a future purchaser. We would also recommend that you carry out a chancel repair search to ensure that the property has no likelihood of suffering from an existing liability for chancel repair (an old medieval “tax” for the upkeep of the inner part of the medieval parish church) and, upon a successful bid being accepted at auction, you may need to put in place appropriate chancel repair insurance to cover against any liability to pay for the upkeep.

• Will you need any mortgage finance?

If you require a mortgage in order to complete the purchase then it is important that you have a mortgage offer in principle before you bid. You will be required to pay a deposit upon a successful bid and you must ensure that you have the funds available (a bounced cheque will often lose you the deal and leave you open to a claim for damages).   Your mortgage lender will instruct solicitors to consider the property in detail after exchange of contracts so that they can be sure the property offers good security for the amount being advanced. Your own solicitor can often act on behalf the lender as well, however in order to give a clear certificate to the lender confirming that the property offers adequate security, your own solicitor will need to be happy with the property prior to exchange of contracts.

• How much time do I have between a successful bid and completion of the deal?

This depends on the auction contract. You should obtain full legal advice on the auction contract as you will be treated as having accepted all the terms of the contract the moment you submit a bid for the property which is accepted by the auctioneer.

Horror Stories. We have been involved in cases where clients have purchased at auction without checking any documents and without seeking our advice. On one occasion there was no legal access to the first floor flat and on another one there was an occupier in the property not notified to the buyer. On a third case a client took a chance in believing she could sell her own property by the time of completion but the sale fell through and she had tremendous problems arranging finance so she failed to complete and lost the 10% deposit.

DON’T LET THIS HAPPEN TO YOU! Please contact us as soon as you receive the auction particulars so we can check out the conditions, title, searches etc. We can normally of this for a fixed fee.

All of the above points to a necessity to have a solicitor involved in the process of buying a property at auction at the first available opportunity. It may be that you need to have your solicitor consider a number of auction packs before you are in a position to put in a successful bid, however the important thing is to have the confidence to place a successful bid in the knowledge that so far as possible all the legal risks have been dealt with to your satisfaction beforehand.