Repossession is essentially when a mortgage lender takes possession of a property after a borrower defaults (i.e. misses payments).
In property circles, acquiring repossessed houses is often equated to automatically picking up ‘bargains’.
Whilst there may be an element of truth in this, it certainly doesn’t mean that you should overlook the investment credentials and assess the associated risks.
Buying Houses Pre-Repossession
Acquiring a property prior to the point at which a mortgage lender takes possession is a common strategy adopted by ‘quick house sale’ companies like our own (Property Solvers).
Vendors facing the prospect of repossession come to us via our direct marketing efforts in search of a potential solution to what can be a complex predicament.
Yet, sadly, there have been a handful of firms in our space that have been known to take advantage of people in such distressed situations.
As a result, observers often see this as a predatory investment strategy to acquire below market value housing stock from vulnerable sellers.
For this reason, and to demonstrate that this is far from the truth, it’s worth clarifying how we handle these kinds of cases…
The Property Solvers Approach
The reality is that any of us could fall into a default situation.
It’s grossly unfair to simply propose a below market value (BMV) purchase when a number of other options are often available.
Bodies such as the Property Ombudsman and Trading Standards (with who we are registered with) are also scrutinising this marketplace more than ever.
Although they are not as effective as the likes of the Financial Conduct Authority (FCA) from a regulatory standpoint, these days the sell house fast industry is increasingly being held accountable for its actions.
Pre-Repossession – Establishing the Facts
Appreciating the uniquely stressful time for vendors, we start our conversation with an impartial and no-obligation discussion.
Today, even in an environment of historically low interest rates, the risks of falling into mortgage default remain.
For example, homeowners may have accumulated significant unsecured debts which can sometimes compromise their ability to keep up with their mortgage obligations.
They may have also other secured or other financial burdens that are making their net liabilities stretch beyond their means.
During these initial conversations, we often find that there’s a very simple solution.
Property Solvers often refer people to organisations like Citizens Advice, Shelter, National Debtline and the Debt Advice Foundation. Whilst often under-resourced, they are accustomed to dealing with these types of issues every day and can often provide workable solutions.
Furthermore, modern legislation protects vendors facing this situation and the law these days genuinely works in the favour – much more than was previously the case.
Below we have summarised the advice we typically give to homeowners, based on how many months arrears have accumulated. For more detailed information, please check the contents of the Property Solvers stop repossession guide.
1-2 Months Mortgage Arrears
If the homeowner is one or two months in arrears, it’s usually a case of keeping in regular touch with the mortgage lender and coming to a mutually agreeable payment plan.
Lenders are governed by the Mortgages and Home Finance: Conduct of Business Sourcebook and must adhere to what’s known as the pre-action protocol.
These rules essentially mean that the lender has a legal obligation to treat homeowners in arrears fairly and discuss any financial situation in an honest manner. Borrowers must also be given a sufficient amount of time for any arrears to be cleared.
In other words, whilst homeowners facing the prospect of repossession certainly shouldn’t ‘bury their heads in the sand’, lenders cannot take a draconian approach.
House repossession is a last resort and must not be initiated unless all other reasonable attempts to resolve the situation have failed.
We go on to suggest that the homeowner calculates how much they can realistically afford to pay (both with regards to the arrears and the ongoing mortgage payments).
They can then make this proposal to the lender who must respond without placing any undue pressure.
The pre-action protocol rules also underline that mortgage companies cannot initiate repossession proceedings where…
- The borrower can demonstrate how any arrears can be cleared over a specific timeframe whilst keeping up with ongoing mortgage payments. This proof can be through payslips, evidence of savings or borrowing from friends / family for example;
- The borrower has a Support for Mortgage Interest (SMI) application in process;
- There is a legitimate insurance claim under a mortgage payment protection policy underway. These policies usually cover borrowers in the event of unemployment or sickness;
- Financial assistance, known as ‘Preventing Repossessions Funds’, is being sought. Some councils also offer ‘Homelessness Prevention Schemes’;
- The borrower has made a claim to the Department for Work and Pensions (DWP) for income support, income-based Job Seeker’s Allowance (JSA), pension credits (available for the over 60s), tax credits, Universal Credit and/or income-related Employment and Support Allowance (ESA);
- Instead of selling, the borrower wants to rent out the property. In this scenario, the income will be used to cover the cost of the mortgage (and the arrears will be cleared);
- The borrower is contracting an Independent Financial Advisor (IFA) who will liaise with the lender and the court to resolve the situation;
- A complaint has been made to the Financial Ombudsman Service (FOS) about how the lender has been dealing with the arrears. The lender is obliged to hold back on any intention to repossess until the matter is dealt with sufficiently;
- The property is being sold at a price that will clear the entire mortgage debt, arrears and associated selling costs.
2-3 Months Mortgage Arrears
Once the 2-month mortgage arrears point arrives, things tend to get more serious. However, stopping repossession without homeowners losing their homes is entirely possible…
Lenders tend to think the worse on borrowers who are avoiding them.
A certain amount of leeway is allowed but if a borrower continues to delay things or makes false promises, then further action may be taken by the lender’s legal department.
This will go beyond the standard warning letters and usually results in summoning to attend court.
If the situation has escalated to this point, we always underline the fact there is still time (usually between three and eight weeks) to turn things around.
Typically, we would also advise the following:
- If the client has a court date, we stress that honesty is the best policy – as is remaining calm. Even in what may seem like a critically bad situation, the law is there to protect borrowers;
- As long as the borrower has acted responsibly, kept in touch with the lender, explored all the options to clear the mortgage and made realistic proposals, the judge will be on his/her side;
- Homeowners should complete the N11M defence form which enables them to explain their own personal and financial circumstances. Any attempts to pay the arrears can also be outlined;
- If repossession is looking more imminent, we often suggest that the borrower also fills in the N244 County Court form. This can help to stop or at least postpone an eviction order;
- A token payment (however small) is often a good idea as it demonstrates a clear will to prevent the worse from happening;
- We remind people that they may have access to Legal Aid via the Housing Possession Court Duty Schemes (HPCDS). Note this assistance is only available in England;
- If the homeowner simply wants to sell up, we will formulate a solution based on how much time is available;
- If time is of the essence and the judge has granted repossession, we discuss our quick cash sale option (where we can exchange contracts in as little as 24 hours and complete within the following 7 days). This usually occurs after 2 or 3 hearings and the homeowner has not been proactive, breached a suspended warrant for possession or is not in a position to pay off the arrears;
- In most cases, the borrower can buy a sufficient amount of time to sell the property on the open market (through our express sale service, for example).
Buying Houses Post-Repossession
Once a property has been repossessed, the owner relinquishes all rights and it is now up to the lender to dispose of the property.
Their priority will be to recoup the total amount of the loan by selling the property as quickly as possible.
Any shortfall may then be due by the borrower, who will also be liable for associated legal and court costs alongside the estate agency or auction fees incurred by the lender.
It is therefore in the lender’s best interest to get the best price possible from the sale. At the same time, they need to price it competitively to attract interest.
If a borrower has further secured debt against the property (and it is being sold with little or negative equity), the lender will subsequently chase what’s owed once it’s sold.
Where to Find Repossessed Property
A common misunderstanding is to think a repossessed property is a good deal simply by virtue of the fact that it has now reverted back to the lender.
Whilst there are certainly opportunities, it’s imperative to engage in the same detailed level of due diligence as for any other investment. We would strongly suggest assessing what works would be required (see our previous post on property refurbishment).
Lenders are required to sell repossessed property on the open market for the best price possible – typically through reputable estate agencies and auction houses.
Most will therefore appear on the main portals like Rightmove and Zoopla. Look out for listings with only a handful of photos, poor descriptions and a general feeling that the property is not being lived in.
Estate agents and auction house representatives usually also divulge that the property has been repossessed.
Be wary of deal packagers who claim to have a direct connection with lenders to source repossessed properties. Lenders rarely use this approach to sell this type of stock.
Buying a Repossessed Property
If the property is advertised through an estate agent, the process is slightly different from a normal sale.
Once an offer has been received and accepted by the lender, the agent must insert a ‘Notice of Offer’ on the listing. Other prospective buyers can then bid above this level for a set period of time (usually 7 to 14 days).
Yet, even once the offer has been accepted and the notice removed, the lender still does not need to commit to the sale. This means that, even after paying out conveyancing fees, surveys and associated costs, if another buyer offers a higher figure, you’ll more than likely lose out on the deal. In other words, you’re susceptible to getting gazumped.
This is why most property investors prefer to buy through auction houses. Once the gavel falls, neither party can pull out. Note that you will have to pay a deposit (typically 10%) and have 28 days to complete on the sale.
Remember to ask your solicitor to run through all paperwork before moving ahead. Be wary of restrictive covenants, negative easements, problematic tenants in situ amongst other issues.
Funding a Repossessed Property Purchase
Should the property stack up financially, it’s more than likely that a number of buyers will be circulating with an offer.
The quicker you are able to move, the better.
Note that being a mortgage buyer does not necessarily preclude you from having a chance. However, cash buyers are likely to be looked at more favourably as the bank will be able to dispose of the property quicker.
For this reason, you may want to look into bridging finance or some other kind of debt facility that’s accessible within a short timeframe. However, remember to account for the high-interest costs and arrangement fees with these types of loans.
If you’re buying at auction and looking into a more standard mortgage to fund the purchase, make sure that you will be able to complete after 28 days after the hammer falls (exchange of contracts).