Mortgagee auctions can offer a bargain. Here's our guide to making the most of it.

Buying a bargain in the current housing market is far from rocket science. If you have the money and have a budget beyond the reach of most first-home buyers buy now. Well done.

What sets the scientists apart from the simply cashed-up is shopping around the increasing number of cases where the bank is stepping in because of a home-owner's failure to meet mortgage repayments. It's a situation in which the price of a home is discounted 10 to 15 per cent.

As figures from Fujitsu Consulting show, in April the number of severely stressed households rose 3 per cent, leaving 101,000 households facing repossession. Worse, if unemployment rises to 7.5 per cent by the end of the year, residential foreclosures could increase four-fold.

"There is a good reason why these properties are being marketed as mortgagee sales. They attract buyers because everyone knows these are genuine sales with a motivated vendor," SydneySlice buyer's agent Deborah West says. "But that interest can also create competition and make the property less of a bargain. So buyers need to do their homework to make sure they are actually getting a discounted sale, if that is what they are after."

The science is in knowing if it is indeed a bargain or if the hype surrounding a mortgagee sale will force the sale price above market value.

The upside of the downside

"Mortgagee sales tend to be a good buying opportunity because the general mindset is that they are a bargain and that tends to become a self-fulfilling prophecy," the chief executive of McGrath Estate Agents, John McGrath, says.

"Secondly, you are not dealing with a vendor with high expectations. Most mortgagees will meet the market on the day. And they tend to go to auction with a fire-sale valuation and set their reserve accordingly. That combination of an eager vendor and a buyer who expects a good sale often culminates in a bargain."

All of which explains why some of the big lenders insist "mortgagee in possession" is not mentioned in the marketing.

As the managing director of "mortgage realisation" company Merc, Robin Matters, says, even though a mortgagee in possession is often advertised nowadays, "we don't like to because people's psychology changes. People tend to talk themselves down in price on the property in that case."

That situation is not helped, McGrath says, bythe fact that "mortgagee sales tend to be presented poorly, they are often in need of repairs, the marketing isn't up to scratch and they might be unfurnished, which also detractsfrom the value. All of [those factors don't] help get the best sale price."

For example, McGrath adds, an owner-occupier might spend $10,000 on marketing andpresenting their property but a mortgagee in possession might spend only $5000 or $6000.

"All of these things are why I'm seeingexamples of houses selling for a good 10 to 15 per cent less than they wouldotherwise."

Competing interests

Despite this, there are many selling agents and lenders who see the advantages of appealing to buyer greed, the principal auctioneer of Auctionworks, David Scholes, says.

"Certainly we would get double the number of registered bidders for a property advertised as a mortgagee in possession than we would for a property owned by a private lender," Scholes says. "That interest in the property and the numbers at the auction increase the competition and so the ultimate sale price goes up accordingly." It is a strategy that is hoped to prove lucrative today when Callagher Estate Agents sells a landmark five-bedroom Victorian mansion on 455 sq m with a turret and city views in Clarendon Road, Stanmore. Australian Property Monitors shows it last sold in 2003 for $1.525 million, but now there are hopes for about $1.4 million. Partly owned by the Constantinidis family, another agent had it on the market for $2.4 million in January 2008 but it never sold.

"There is that perception that it's a fire sale but that's not really true in this market," says Callagher selling agent Ray Haines. "There are people who have gone over their heads into debt and who can no longer pay for the house. Meanwhile the valuation on their property has come down and the bank still needs to recoup as much as it can on the day to cover their debt.

"The bank might take a small shortfall but they can't afford a fire sale."

Scholes adds a cautionary note for buyers: the reserve is often determined by valuers who are basing their valuation on dated information and in a degenerating market that means the reserve can be set is higher than it should be.

Finding them

Finding a mortgagee sale is a sport in itself. And that, Scholes says, is largely because, "alot of banks don't like to advertise a property as a mortgagee sale because they feel it has a bad connotation on their trading arm".

FindersKeepers buyer's agent Lisa Bradley suggests buyers enter "mortgagee" in an online property search on websites such as domain.com.au. "It won't give you a full list because mortgagee sales are not necessarily advertised as such," she says. "But it's a good place to start.

"If you're in an area where properties are usually sold by private treaty, look out for properties going to auction. That can be a sign of a mortgagee sale because they are more likely to be by auction."

Failing that, the website nmddata.com.au lists only mortgagee sales and deceased estates on the market around the country. It has about 300 listings at any given time.

NMDData managing director John Kovacs says the database has grown 37 per cent since January. Sydneysiders should find plenty to look at, with NSW claiming 44 per cent of listings nationwide.

Tricks of the trade

"Turn up on the day," is the advice of Brad Caldwell-Eyles, of Langsam+Caldwell. Eyles Real Estate, whose eastern suburbs agency has handled an increased number of mortgagee sales from five a year to an average of four a month.

"If there is no real competition on the day then the bank will usually let it go under a certain level rather than leave it sitting on themarket."

West adds: "And they almost always go to auction, so pre-auction offers won't usually beaccepted."

Do not forget to do your due diligence and make sure you compare recent sales in the area to determine the property's market value, Buyer's Service for Real Estate buyer's agent Brendan Jack warns.

"Some buyers in the boom did pay too much for property because they got carried away emotionally, so buyers who assume they are getting a bargain because they paid less than the former owners could well pay too much again," Jacksays.

"You only know what the value is by looking at what other similar houses in the area are selling for."

High-end sales

While Sydney's south-west became known as the epicentre of Sydney's mortgagee-in-possession market 18 months ago, experts warn such foreclosures are set to spread throughout the city as unemployment rises.

As McGrath says: "While there are not large quantities in the inner suburbs and coastal areas, that is expected to increase over the next six months by about 25per cent from currentvolumes."

Indeed, mortgage and property realisation firms Australian Property Auction Company and Merc already report more mortgagee sales in the $1 million-plus range.

"That is something we don't usually see because those home-owners usually have much greater equity in their homes," says APAC's national sales manager, Stephen Walsh.

In response to these pressures, the big four banks have adopted a set of principles to help home-owners are suffering mortgage stress and includes offers to adjust the terms of the mortgage contract by providing a repayment holiday or making interest-only repayments for a short period of time.

"The banks are trying not to saturate the market in these types of sales because there would be significantly more write-downs," says Paul Leroy, a senior partner at Hall Chadwick Accountants. "They will try to resolve the issue, rather than be harsh, by offering these more lenient and compassionate measures before they foreclose."

Pitfalls

Be aware that the competition surrounding a mortgagee in possession can force the sale price higher than true market value.

Do not assume the previous sale price of a property was a true reflection of market value. A better gauge is looking at recent sales in the street.

Have a solicitor check the contract for caveats or any charges. Buyer's agent Deborah West recommends that if there are any discrepancies you make sure any further debts or caveats are discharged on settlement.

Check the inclusions on the contract. You could find there's no stove or light fittings.

Source: Fairfax