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Buying a Farm Through a Mortgagee Sale - A Bargain or a Risk?

29 July 2016

A mortgagee sale occurs when the owner of a property has taken a loan from a lender as mortgagee (usually a bank) to enable them to purchase the property. As a result of the property owner not meeting their obligations under the terms of the mortgage, usually by not meeting their mortgage repayments, the lender exercises its power of sale by selling the property to recover its debt.

Mortgagee sales often provide an opportunity for a buyer to ‘grab a bargain’. There are, however, significant risks attached to buying at a mortgagee sale; many potential buyers aren’t aware of these risks. The Sale and Purchase Agreement used in a mortgagee sale differs from a standard agreement. Typically, the agreement will be heavily amended to provide you have little or no recourse against the Bank (acting as Vendor) for any issues which may arise or come to your attention after you have taken ownership of the property.

You need to know that items, such as troughs, gates, or basically anything the property owner can remove from the property won’t necessarily be there when you take ownership of the property. There have been situations where buyers have been left with little more than an empty shell of a house after the previous owners removed everything they physically could.  As mentioned previously, in an instance such as this you would still be required to complete the purchase.

The risk of damage caused to the property passes to you, as purchaser, when the Agreement becomes unconditional. You should arrange for the property to be insured from the date the Agreement becomes unconditional. This is often difficult as insurers are wary of insuring a property of which you don’t have legal possession.

A mortgagee selling the property will not provide you with warranty that on settlement the property will be vacated by any unlawful occupants (usually the mortgagor/previous owners). If the occupants refuse to leave the property it will be your responsibility to have them removed; you’ll need to get and enforce a trespass notice or a possession order.

Unfortunately, many property buyers don’t ask for legal advice before they sign an Agreement for Sale and Purchase. You also need to remember that a real estate agent acts for the vendor and they have a vested interest in getting an Agreement signed. Your purchase is their means to getting paid. Always get legal advice before you sign an Agreement for Sale and Purchase; as it could end up costing you a lot less in the long run.

Odette Cottle is a Senior Solicitor in the Business, Rural & Property team at Norris Ward McKinnon. You can contact Odette at odette.cottle@nwm.co.nz