How to buy a repossessed property
Repossessions are at a 14-year high, so now is the perfect time to bag a property bargain. However, be aware of the pitfalls too...
The headline of this article probably conjures up a raft of emotive images. Abandoned houses, derelict sites, and visions of all those happy memories gone wrong.
But repossessed properties can also provide a beacon of hope for many would-be homeowners, and if you're a first time buyer on a budget or simply a house-hunter looking for a bargain, repossessed properties could present a perfect chance to bag your first home.
On the rise
With more borrowers under stress, repossessed properties are also becoming easier to come by. According to the Council of Mortgage Lenders, 10,200 homes were repossessed in the final quarter of 2009, taking the total for the year to 46,000 - the highest level since 1995. The situation is expected to get worse as well, as detailed in Repossessions to jump in 2010.
So how do you go about finding one, and how does the buying process differ from usual?
Before we start, the first point to mention is if you are a first-time buyer, diving head first into the quagmire of repossessed properties can mean you quickly find yourself in too deep.
You must remember that the owner of a repossessed property will be a bank, not a person, and therefore it is only interested in getting the most for the property that it can.
So get your finances in order. And be prepared for a hard slog. It won't be easy.
First things first
Getting your finances in order means getting an agreement in principle from your mortgage lender. This way, you'll know how much you can borrow, and more importantly, how much you can afford.
You can get a certificate showing how much you can borrow, which will demonstrate to the vendor that you have the means to buy the property. Plus, it won't cost you anything more than a credit check.
Before you can buy a repossessed property, you'll have to find one first! Smaller estate agents and property websites such as Rightmove and Globrix advertise them, although they don't have to explicitly say it's repossessed. Cheap sites, with no photos and vague descriptions usually give them away though. Alternatively, you could ask your agent about repossessed or distress sales.
The other place you will often find repossessed properties is at a property auction. I've been to a couple of property auctions in the past, and they can be pretty daunting. They are likely to be crawling with investors with deeper pockets than you could ever imagine. So it's vital to know what you're doing. Read How to buy a property at auction to find out more.
Just bear in mind that if you are interested in buying at auction, properties will be advertised in a catalogue weeks in advance of the auction date. You'll be able to view the properties on offer before the day of the auction.
The buying process
So, obviously, once you've found a repossessed property you like, you should go and visit it. That way you'll be able to view any kinks, imperfections or potential disasters for yourself. This is also the point where you can fall in love with the property, and it's also when the rollercoaster ride of trying to seal the deal begins.
If you're not buying at auction, the process is highly complex. Unlike a conventional transaction, when an offer has been made and accepted on a repossessed property, the estate agent is legally obliged to place a 'Notice of offer' in the newspaper to announce this, and other bidders are invited in for a period of seven days from the date of the advert.
During this time, potential property hounds can swoop in to offer a better deal. And even after the week is up, someone can make a better offer which the bank can accept. This is because, until contracts are exchanged, you have no legal right to buy the property - and the bank doesn't have any honourable or sentimental attachment to you as a buyer, it is only interested in cold hard cash. Someone could bid £1,000 more than you at the last minute and the bank would in all likelihood accept.
However, you will be given a timeline to complete of 28 days. So, you could fork out money for surveys and solicitors, only to find the money goes down the drain on the 27th day.
You have been warned.
Property at auction
The process of buying a repossessed property at auctions is very different from buying a repossessed property through an agent, as once the gavel goes down, you have effectively exchanged contracts, so neither party can back out. As before, however, you must complete the transaction within 28 days.
This may make life simpler, but it also means you have to fork out a deposit on the day of the auction (10%), which you will lose if you back out. So to be on the safe side, you'll need to be 100% sure you want to buy the property, and get the survey and legal work carried out before the auction - even though you won't know at this point whether or not your bid on the day will be successful.
In other words, whichever way you play it, there is a greater risk than usual that you will lose the money you fork out in legal and valuation fees. Then again, you may be prepared to take that risk if it means you end up bagging a bargain.
More often than not, repossessed properties are in need of some TLC. Therefore ensure you factor in these costs to the total amount you are prepared to pay.
Extras, such as repairs and even having a telephone line reconnected can quickly add up. So look after the pennies, as they say, and the pounds will look after themselves.
There is also this gamble you're taking with the survey and solicitors fees - and sometimes it can all turn into a game of poker.
You may be able to avoid valuation fees by getting a mortgage with a free survey, but this could push up the interest rate you'll pay on the mortgage, meaning you'd end up paying more over the lifetime of the mortgage anyway.
Similarly, you may be able to find a solicitor who will only charge you if the transaction completes - but the fees he or she charges may then be higher than normal.
And remember that you absolutely have to complete your purchase within 28 days. Normally the buying process takes at least twice this long. So you may have to do a lot of chasing, and incur some hair-loss along the way.
The important thing is not to rest on your laurels and wait for everything to happen by itself. It may seem a bit much, but the brokers in our lovemoney.com mortgage team recommend chasing both the solicitors and lenders at least twice a week and asking them what's outstanding, and what's being done about it.
The plus side is that the quicker the transaction takes place, the quicker you can collect the keys to your new home.
Hopefully you can see now that buying a repossessed property involves a lot more than just spotting and picking up a bargain. The rise in repossessions may be a cash-buyer's dream come true, but for everyone else, make sure you know what you're getting into. There's a lot of hard travelling before you get to sign on the dotted line.
This is a lovemoney.com classic article, originally published on 28 May 2009, and has been updated.
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