By Victor Kumar
As you’re hopefully starting to discover there are a number of reasons why a property may be for sale under market value.
Last month, we looked at distressed sales – so those properties that are being sold due to financial or emotional distress, such as divorce or relationship breakdown.
No matter what type of property you’re buying, one of the fundamental parts of your research must always be understanding the seller’s motivation or driver.
Many times the vendor will be a regular man or woman, or a combination of one or the other, who is selling because they are simply moving to another suburb, city or country.
Sometimes, however, the vendor is not really a person at all. Sometimes the seller is something called an institutional vendor, which can be beneficial to you but usually means poor times for the unfortunate seller.
The four institutional vendors that you’re likely to come across include:
• A bank
• Public trustee
• The housing commission; or
• A liquidator.
One of the most common institutional vendors is a bank. When a bank is selling a property it is usually called a “mortgagee in possession” sale and what this means is that the previous owner/s could no longer afford the mortgage repayments so the bank has taken “possession” of the property in an attempt to recoup the money it loaned.
Another term, used more commonly in the US, is foreclosure. Unlike the US, however, Australians can’t just walk away from their homes and simply leave the keys in the door as they go.
Here, if a bank takes possession of a property because the owners can no longer afford it, they will usually try to sell it as quickly as possible and are usually not too fussed by the price because speed is the ultimate aim. They do have a legal obligation to attempt to get the highest price for the property, but their attempts can usually just involve selling the property at auction.
What this means, of course, is that buyers can often pick up a property significantly under market value. Not all mortgagee in possession sales are advertised as such though, so you’ll need to know where to look and who to ask if you’re interested in these types of properties.
We all know we should prepare wills, but many people just never get around to it – look at Prince, who was worth millions but who died without a will.
But if you die without a will, and you have assets such as real estate, then the public trustee will usually step in to sell any properties within your estate.
Just like the banks, the public trustee usually wants to get this done quickly, and often at minimal cost, so again there could be some good opportunities available.
Unlike mortgage in possession sales, public trustee sales are usually easier to find by going to the relevant state or territory websites.
There used to be a time when our state governments provided a huge number of houses for the less fortunate to live in. But over the years this “responsibility” has been handed over more and more to private investors like you and I.
What this change of heart (and social policy) means is that housing commission homes often come onto the market and again can be under-valued. This is especially true when you consider that many inner-city areas once had a proportion of housing commission properties, which also usually had large blocks of land.
Over the years, these properties were often quite neglected by tenants and the relevant government department, so today they can offer great renovation potential.
The final institutional sale which you can profit from are properties being sold by liquidators, who are brought in when a company has gone into liquidation and assets are being sold – again usually very quickly – to raise funds.
Just as with banks and public trustees, if a speedy sale is the goal, then it means you could also secure an under market value property if you can move quickly (but never without doing your due diligence, of course).
Keeping an eye out for any institutional sales can be a sound investment strategy, because most of the time, in my experience, the properties on offer are under market value and can be improved for capital or cash flow gain relatively easily.
In my next blog in this series, we’ll take a look at under-valued properties that only have their poor marketing and presentation to blame for their bad situation.
By Victor Kumar