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A borrower losing their home because they can’t keep up with their loan repayments is an undeniably horrible situation. Those in the market for these properties might seem a bit like vultures: during the Great Depression in the US, gangs of armed farmers would gather at foreclosure auctions to intimidate potential bidders and make sure the original owner could buy back their home. These days, it’s generally grudgingly accepted by most people that lenders need to be able to recoup losses through reclaiming securitised assets. Those in the market to buy the properties banks repossess are therefore arguably a pretty important part of the financial system, so you shouldn’t feel too guilty about investigating how it all works.

While foreclosed properties are often opportunities for buying at a bargain, there’s plenty to wrap your head around before diving straight in.

What is a foreclosed property?

Foreclosed homes are properties seized by a bank because the borrower and previous owner could not keep up with the loan repayments. Although often used interchangeably, the word ‘mortgage’ isn’t synonymous with ‘home loan': a mortgage is an agreement that the mortgagee (lender) can take possession of the property back from the mortgagor (borrower) in the event of a default. Anyone who takes on a mortgage is giving their lender the right to reclaim the property if they can’t repay the loan.

Due to the time and cost involved, repossessing property is generally looked at by lenders as an absolute last resort. Most banks and other home loan providers have financial hardship assistance teams which borrowers who are struggling are encouraged to contact as soon as possible. Those who have suffered a change of circumstance (job loss or illness for example) can sometimes have their repayments temporarily reduced.

If this isn’t the case, after a borrower has been in arrears for a certain amount of time (normally between 60 and 90 days), they are issued with a default notice. From the date this is received, the borrower has 30 days to rectify the deficit. If they are still behind once this period is up, the lender will probably start the repossession process.

Distressed listings

Prior to the start of the formal repossession process, property owners sometimes recognise they are not going to be able to pay the mortgage and try to sell the property beforehand. These sales are known as distressed listings, and many of the same principles apply as with buying foreclosed homes. The difference is that buying a distressed listing does not involve dealing with a bank, as the property has not yet been repossessed.

What’s the difference between foreclosure and mortgage repossession?

Although similar, repossessing and foreclosing a property are not exactly the same thing. Foreclosure means the bank takes over as the owner of the house and evicts the existing owner, while with repossession the lender gets a court order to take over the property and sell it. When a property is repossessed, the original owner stays on the title until a buyer settles.

In Australia, the repossession process is generally more efficient, so tends to be preferred by lenders over foreclosure. This is also sometimes known as a mortgagee sale.

In both cases, the property tends to be sold through auction, although is sometimes done privately.

Pros of buying foreclosed homes

There are a few advantages to buying a foreclosed property or distressed listing.

Fast settlement

Both the seller of a distressed listing and a lender with a repossessed property will likely want to get the transaction pushed through as soon as possible. The settlement period can therefore be shorter than for normal property sales.

Discounted price

The lender or borrower selling the property might not hold out for the highest possible price like a typical seller. A borrower selling a distressed listing likely just wants to make sure they sell for more than the outstanding amount owed on the loan, so they aren’t left with an outstanding debt even after the property is gone. A lender meanwhile also likely just wants to get rid of the property as soon as possible, although there are legal requirements that lenders need to follow to give ample opportunity for the property to sell at market value.

According to Real Estate Deals Australia, the average mortgagee in possession or foreclosure listing in Australia sells for 10% below market value.

Cons of buying foreclosed homes

Condition of the property

A homeowner that defaulted on their mortgage is unlikely to have had the spare cash to address any repairs or issues with the property. It’s important to check out the property and ensure there are no major problems.

No cooling off period

Unlike private sales, when a property is sold at auction there is no cooling off period. This means you’ll need to settle even if the house doesn’t pass inspections or you are rejected for finance. It’s therefore even more important to do due diligence beforehand when exploring foreclosure/mortgagee auctions.

Buying foreclosed properties in 2024

How to find foreclosed properties in Australia

There are a few ways to find distressed listings or foreclosed properties for sale. Firstly, you could head to a site like Domain or REA and search using some of the following terms:

  • Distressed
  • Mortgagee in possession
  • Mortgagee sale
  • Priced to sell
  • Forced

SQM Research have a distressed listings report available with “tens of thousands” of properties either sold under duress or by the mortgagee, but there is a monthly subscription fee (currently $39.95).

Alternatively, you could consult a buyers agent who specialises in finding these kinds of properties, who might have the connections to find off market properties.

Top owner occupied home loans

The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
6.04% p.a.
6.06% p.a.
Principal & Interest
Featured Online ExclusiveUp to $4k cashback
  • Immediate cashback upon settlement
  • $2000 for loans up to $700,000
  • $4000 for loans over $700,000
5.99% p.a.
5.90% p.a.
Principal & Interest
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
5.94% p.a.
5.95% p.a.
Principal & Interest
5.95% p.a.
5.95% p.a.
Principal & Interest
6.08% p.a.
6.14% p.a.
Principal & Interest
6.14% p.a.
6.16% p.a.
Principal & Interest
  • Find out your loan eligibility in 2 minutes or less
  • Complete your application in less than 20 minutes
  • Low fees and fast approval times
Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of .

Do your research

Doing your due diligence on the property before putting in an offer is arguably even more important than with conventional sales. Once you’ve bought a property at auction, there’s no going back, even if you find mouldy foundations or a colony of rats in the attic. If you haven’t had the opportunity to inspect a property up at auction, you should be extremely cautious before putting in an offer.

Remember, that just because a property is a bargain doesn’t necessarily mean you should buy it. Research the local area - have there been multiple mortgage repossessions locally? What are employment opportunities like in the area? How are property values performing and what are the trends and rental demand like?

Get pre-approval

If you buy at a foreclosure auction, you will also not be able to pull out of settlement if you can’t get finance. It’s therefore vital to get pre-approval sorted beforehand, whether it be through a mortgage broker or contacting a lender directly.

Be prepared for a fast settlement

Lenders are typically eager to offload foreclosed properties quickly, which often leads to fast settlement periods. To navigate this scenario, it’s crucial to be decisive about your property choice, considering the unlikelihood of a cooling-off period. Engaging a good solicitor is key for fast paperwork processing to avoid potential late settlement fees.

Photo by Jackie Alexander on Unsplash