Tips for buying foreclosed properties: Your ultimate guide

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.

Fun fact, 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 or lender after a borrower and previous owner fails to keep up with the loan repayments. It sees the bank or lender strip the borrower from the property's title and instate itself instead.

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.

What is a mortgagee in possession property?

Although similar, repossessing and foreclosing a property are not exactly the same thing.

When a property is repossessed, the original owner stays on the title until a new buyer settles. In the meantime, the lender gets a court order to take over the property and sell it.

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

What are distressed listings?

It's worth noting here that a 'distressed' property sale is another thing entirely. It's a home that's being put up for sale by a borrower who may be struggling to meet their mortgage repayments and wants to sell the property that's in danger of being repossessed.

When considering distressed listings, 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.

Are mortgagee in possession properties cheaper?

Like most property transactions, the ultimate sale price will depend on many variables - the home itself, its location and condition, and demand in the wider market. Some repossessed or mortgagee in possession properties sell for less than comparable properties while others may go for fair market value or above.

By law, lenders are obliged to get the best possible price for a repossessed home, with the previous owner entitled to any proceeds exceeding their debt and sale costs.

To achieve this, a lender will generally appoint a real estate agent and a suitable reserve price may be set for the property based on their advice. The lender is also required to undertake an adequate marketing campaign.

However, the lender's primary aim is to recoup the amount owing on the defaulted home loan plus any reasonable costs incurred in taking possession and selling the property. Many lenders will likely be more interested in securing a timely sale than in making the property presentable or marketable.

Should I buy a mortgagee in possession home?

As a potential buyer of a repossessed home, it's worth remember that just because something's 'cheap', may not mean it's a bargain.

If the previous homeowners were unable to meet their mortgage repayments, it's likely they were unable to meet other home-related expenses as well, like maintenance, repairs, and utilities. Mortgagee in possession, or repossessed properties, are typically sold 'as is'. They may need cleaning up, maintenance, repairs, or services reconnected - all costs that need to be taken into account on top of the sale price.

See also: Crucial things to check when buying a house

Given lenders are keen for a timely sale, sometimes the settlement process can be quick. But it's worth noting a repossessed home may bring extra conveyancing complexities, particularly if it's tied up in separate bankruptcy proceedings. Such complications may lead to settlement delays as well as more expensive bills from conveyancers or lawyers.

How do mortgagee in possession sales differ from standard sales?

There may be less time and opportunity to inspect mortgage in possession properties, or at least to conduct thorough investigation of potential issues such as structural or compliance problems.

Additionally, the seller (the bank or lender) may not be overly familiar with the property and thus mightn't be required to disclose certain issues. It's highly advisable to conduct your own inspections and thoroughly research the property before you sign a contract of sale.

As well as there generally being no negotiation on price, sale contracts on mortgage in possession properties are not the same as standard sale contracts. They're often subject to a number of 'special conditions', effectively stating the buyer is purchasing the property 'as is' with all known faults and defects and no right of recourse against the seller. It's extremely difficult to back out of a mortgagee in possession contract once you've entered one.

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 2025

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 realestate.com.au 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.

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.

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

Important Information and Comparison Rate Warning

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.

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