What lurks beneath the repo surface?

The pros and cons of investing in repossessed property.

October 28, 2016

Repossessed properties (“PIPs”) are properties that have been seized by the financial institution due to non-payment of monthly instalments by the bond holder. Such properties are then auctioned or sold by the financial institution to recover their investment.

The upside

Because the financial institution would typically sell on sheriff’ auction, repossessed properties are often available at lower than market value prices, providing for profitable investment opportunities. This is subject to the principal creditor (the ex-mortgagee) not buying in to limit its own damages. Should this be the case, the bank as the owner will then sell the property should they get acceptable offers.

All arrear rates and taxes are also covered by the bank, the seller in this case, which ensures that the relevant rates clearance certification is acquired to proceed with the transfer.

In addition, because the bank has a vested interest in the sale of the property, they will be involved in the transaction for the most part and could assist with the acquisition of finance for the purchase as the lending institution.

The risks

There are potential risks involved in any property purchase, and when it comes to repossessed property this is no different.

One of the largest risks is related to tenants who do not vacate the premises or do not pay rental towards occupation. With the introduction of the PIE Act, it has become more difficult to evict a tenant if they do not have any other residence or the means to obtain one. This can result in a drawn out and costly legal battle.

In addition, in situations where a property is repossessed due to lack of bond repayment, it is possible that maintenance of a property may have been neglected. Therefore, there are financial risks associated with renovations or rectifications that the property may require.

Repossessed properties are sold “voetstoots”, or as is, and therefore any hidden costs associated with the property will most probably be for the purchaser to manage.

Protective measures

The starting point should always be thorough research. This will uncover any structural damages to the property or issues that can’t be easily rectified or which might be costly to resolve.

This research should also include an analysis of the property market to determine a fair and reasonable sale price for the property based on the size and condition of the property, and the area it is in.

As part of the offer to purchase, it is also possible to include a clause stipulating that the balance of the purchase price will only become due once the property is vacant to avoid any trouble relating to tenant eviction.

Most importantly, it is advisable to work with professionals as part of this process to ensure the research and inspections are concluded accurately and that the offer to purchase sets up a positive investment.

Written by Wessel de Kock

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