What Happens When Lenders Sell Repossessed Properties?

There is a common misconception that mortgage lenders auction off repossessed properties at rock-bottom prices. In reality, mortgage lenders have a legal duty to the borrower to sell repossessed properties for the best price they can get.

What Happens When a Property is Repossessed

When a property is repossessed by bailiffs they will change the locks, shut off utility supplies and ensure that taps and cisterns are not going to leak. The bailiffs’ responsibility is to physically repossess the property and ensure that it is secure. Whilst it would be contrary to their duties to damage a property, bailiffs’ activities would not win them any home-improvement prizes. It is usually obvious when a property has been repossessed and it is likely to attract lower offers as a result.

Many borrowers find it frustrating that there may be a delay between a property being repossessed and subsequently sold. This can be particularly galling if a borrower was denied the time to sell the property themselves. There are many reasons why a mortgage lender may take time to sell a property – they may have many other properties to sell or be waiting until property prices rise.

Repossessed Properties Occupied by Tenants

If a mortgaged property is occupied by authorised tenants when it is repossessed receivers will be appointed by the lender to administer the property. After repossession, the tenants may be allowed to remain in the property under the terms of their original tenancy agreement but should pay the rent to the receivers rather than to the landlord.

The mortgage lender will usually start a repossession case against the tenants so that the property can be sold with vacant possession. The mortgage lender will have to obtain a court order before the tenants can be evicted resulting in an inevitable delay in the sale process.

How Mortgage Lenders Obtain the Best Price for Repossessed Properties

To satisfy their duty to get the best price they reasonably can, a mortgage lender should place a property on the open market. Whilst a repossessed property may be sold at auction many are marketed in the usual way through estate agents. Once an appropriate offer has been received on a repossessed property advertisements may be placed by the agents inviting higher offers before exchange takes place. Mortgage lenders also have a duty not to incur unnecessary costs when they sell a repossessed property.

Claims for the Underselling of Repossessed Properties

If a borrower believes that a mortgage lender has failed in their duty to get the best price they can for a repossessed property they may bring their own case against the lender for damages. These damages would probably be the difference between what the property should have been sold for and what it was actually sold for. A similar case could also be brought if a borrower believes that the costs of the sale were too high. A borrower has six years from the date of the mortgage lender’s failure in which to start a court case. However, as with any court case there will almost certainly be potential costs implications so caution should be exercised before rushing to court – especially if the breach is not substantial.

What Happens to the Sale Proceeds from Repossessed Properties

When a mortgage lender sells a repossessed property the sale proceeds must first be used to redeem any prior mortgages on the property. The lender will then use any of the sale proceeds remaining to clear their own debt. However, the lender will also use the sale proceeds to discharge any costs or fees which they have incurred during the repossession or sale process. These can easily add thousands of pounds to the mortgage debt – taking a substantial bite out of anything left over. When the mortgage lender has cleared the mortgage debt and their costs the balance of the sale proceeds will be passed to the borrower.

Properties in Negative Equity

Repossessed properties may be sold at a price which does not cover the mortgage debt and all of the lender’s costs. The borrower will remain liable to pay any shortfall between the sale price and the mortgage debt and costs. A mortgage lender can usually wait up to 12 years before starting a new court case to recover this debt. In some circumstances a mortgage lender may be able to wait even longer before taking the matter back to court. This could apply if a borrower admitted that there was a shortfall, or made payments towards it, after the property was repossessed.