Buying property knowing that vendor has debts owing

[testingw00]

Hi all,

Still a relatively new investor, so please bear with me

I would like to know if there is huge risks in purchasing a property at a bargain price because the vendors are desperate to sell?

I'm currently looking at a property, where the vendor has over $7K of overdue payments outstanding to body corporate. This then raises more questions and gives me an insight into their financial history, in particular their likelihood of meeting their financial obligations to the bank/lender.

How likely would the vendor's lender allow the sale to proceed to me should I purchase the property? If the vendor agreed to a sale price that is worth less than it's real value and are still owing money to the bank/lender, would the vendor's bank/lender prefer to take ownership of the property and not sell to me?

Thanks.

 

[Aaron_C]

The vendor's financial position with the bank has nothing to do with you. If the vendor sells it to you at a bargain price and this is below what the bank is owed, and it is a genuine commercial transaction, then it's too bad for the bank. They cannot stop the sale. However, if it is a mortgagee in possession sale, then yes, the bank does have power over the sale process and they may refuse to sell it to anyone unless they get the price they want.

You do, however, have to be careful with unpaid body corporate fees. The body corporate has the right to collect from the lot-owner for unpaid levies. What you can do, however, is make adjustments in your sale price to pay-out the body corporate upon settlement so no further liability accrues to you after the transfer.

 

[testingw00]

Thanks for the quick response Aaron. It's being sold by the vendor, and not as a mortgagee in possession, so that's a positive.

Will definitely take on board the issues regarding body corp and their need to collect unpaid levies. That'll be a matter to discuss with the solicitor.

Cheers for your help!

I hope this thread also helps other investors out there who are faced with the same situation.

 

[JWR]

Sounds great to me from a purchasing perspective!

It is my understanding that the vendor would use the proceeds from settlement to pay off the outstanding body/corporates or anything else such as council rates etc...

I bought a property yesterday - and mine was the lowest offer of 8 by far - but I got it because there were around $7000 of outstanding council rates/water/sewerage etc... it was a deceased estate - and I offered a $7500 deposit whereas the others only offered $1000 or so. My deposit will be used to pay the debts before settlement - but has allowed them to pay the debts more quickly without incurring large penalty fees (which were due in the next few days - so they needed the deposit as a substitute for a higher price) - This also allowed me to buy cheap - so I am happy and so are they.

SO basically this is a great negotiation tactic for you to get the price lower (so long as you have a little bit of cash available.)

Ask the agent about the outstanding debts and see if you can come to an arrangement - kind of like 'purchasers finance' - but only until settlement so you are not losing very much in interest.

 

[testingw00]

Nice work JWR.

Didn't know you could use that technique as leverage to seal the deal.

I guess it pays to ask plenty of questions beforehand in order to get as much background on the vendor's history and current situation, then see what you can do from there in the negotiation phase.

 

[RightValue]

If the vendor sells it to you at a bargain price and this is below what the bank is owed, and it is a genuine commercial transaction, then it's too bad for the bank. They cannot stop the sale. .

ahhh,,, I think that the bank can refuse to lift the mortgage and surrender the title if it is not paid all it is owed. The contract between the vendor and their bank takes precedence over the sale contract.

This stops the sale.

I could be wrong here but that is my understanding.

For example I have heard of banks refusing to lift the mortgage on an IP that was sold where the loans were crossed and there was not going to be enough collateral in the PPOR; this happens in a falling market sometimes.

 

[Aaron_C]

For example I have heard of banks refusing to lift the mortgage on an IP that was sold where the loans were crossed and there was not going to be enough collateral in the PPOR; this happens in a falling market sometimes.

Yes cross collateralisation can make that happen...Which is why you should never x-coll unless it is very, very urgent.

 

[wobbycarly]

Sounds great to me from a purchasing perspective!

It is my understanding that the vendor would use the proceeds from settlement to pay off the outstanding body/corporates or anything else such as council rates etc...

I bought a property yesterday - and mine was the lowest offer of 8 by far - but I got it because there were around $7000 of outstanding council rates/water/sewerage etc... it was a deceased estate - and I offered a $7500 deposit whereas the others only offered $1000 or so. My deposit will be used to pay the debts before settlement - but has allowed them to pay the debts more quickly without incurring large penalty fees (which were due in the next few days - so they needed the deposit as a substitute for a higher price) - This also allowed me to buy cheap - so I am happy and so are they.

SO basically this is a great negotiation tactic for you to get the price lower (so long as you have a little bit of cash available.)

Ask the agent about the outstanding debts and see if you can come to an arrangement - kind of like 'purchasers finance' - but only until settlement so you are not losing very much in interest.

How do you release the deposit so quickly? Here in Vic a Section 27 takes a while...

 

[JWR]

Not really sure how it works as I'm just new to this game - but we changed the contract slightly to allow for it.

 

[DaveM]

Personally I would not pay a big deposit or allow release of deposit to the vendor to pay the levies prior to settlement.

If they are in that bad a position that they cant pay their levies, then the chances of your money being paid to the levies and not being blown on something else/pay another debtor, well I wouldnt want to do it.

Especially if cant settle in the end because of the mortgagee, your deposit is gone, the OC (or someone else) has your money and you have to sue to get your cash back.

Have it written into teh contract that outstanding levies are to be paid from the proceeds of the sale, and that you will withhold the equivalent amount from settlement until evidence of payment of levies has been shown. You then pay the amount to the vendor.

This will allow the solicitors to include a disbursement to the owners corporation as part of the settlement process. Levies get pro-rated anyway so its not that much extra to ask.

So at settlement, the mortgagee gets paid first, then levies, then the vendors solicitor, then the vendor gets the remainder.

 

[JWR]

The situation was that the house was a deceased estate - and had been vacant for 3 or more years - and the children who owned the estate due to their mother's death had obviously neglected the bills. I saw it as a little risk/high reward scenario so went for it. Each situation is different though and so I would have to individually look at the unique circumstances of the transaction in the future if I were to make another similar decision again.

 

[Marty McDonald]

Lenders certainly can and do stop short sales (where the sale price is less than the amount owing). If they didn't have this power imagine all the shenanigans that could go on with people about to go bankrupt or about to leave the country for a spell.