Making a foray into foreclosures

The Reserve Bank of Australia’s September Financial Stability Review states that “applications for property possessions as a share of the dwelling stock have trended down since 2011 in the states for which data are available (New South Wales, Queensland, Victoria and Western Australia) and are currently at their lowest levels in more than seven years”.

This may be great for the economy as a whole – and the population as individuals – but it does make it tricky to track down those particular bargain properties.

Looking for a foreclosure? John Kovacs, managing director of NMD Data, a company that specialises in distressed properties including mortgagee foreclosures and deceased estates, suggests browsing real estate websites and checking the real estate ads in local and national newspapers and property magazines. “I would also recommend directly contacting real estate agents in your areas of interest and asking them,” he says. You can also contact specialist companies.

Getting started

Preparation is key when looking into foreclosed properties (or any property, for that matter). “The bottom line is: do your research. Don’t assume that it’s an automatic bargain,” says Kovacs. Also, you want to get your finances in order, including obtaining pre-approval of your home loan, as most foreclosed properties sell at auction. “This allows the market to determine its value,” Kovacs says.

He also says you should set a maximum limit. “Research property values in the area to get a handle on the market,” says Kovacs. Talk to local real estate agents about the area you’re interested in and find out whether there’s strong rental demand for properties. Ask the agent whether there are any other mortgagee properties in the area – both to compare properties and to see how many are available in the area. “The more repossession in a given area, the quicker property values fall,” says Kovacs.

Get a builder to inspect the property and organise a pest inspection. Consider your priorities for being close to shops, schools, public transport, government infrastructure, gardens and parks and growth corridors. Basically, make sure it’s in a good location that you like.

Pros and cons

As with any decision, it’s important to weigh the advantages and disadvantages of this type of investment.

Some of the advantages of looking at foreclosed properties include the following:

• You can often buy them for well below market value (10 to 30%).
• First-home buyers may find them a more affordable option for entering the property market.
• They are often easy to rent out due to shortages across Australia.
• They offer vacant possession (banks/lenders arrange all legal proceedings and pay all costs).
• The properties provide a higher rental yield due to a better buy-in price.
• They provide leverage for future investment needs.

Sounds pretty good, right? Now consider the disadvantages:

• You may pay more than it’s worth. ”The auction system is designed to get the best price for the vendor,” says Kovacs. “Many bids are driven by passion, not logic. Know your market; know your area. Do not allow your emotions to take control. This will prevent you from paying too much.”
• You could overcapitalise on the renovations. ”If your intention is to buy, renovate, then flip a mortgagee foreclosure, it’s crucial to set a renovation budget. I’ve seen it time and time again: investors pay far too much for the property, blow out their renovation budgets and when it’s time to sell, lose a hefty sum of money,” says Kovacs.
• You may be locked into a slow-growing capital-growth area.

Practise due diligence when investing in a foreclosed property and you just may end up in the bargain home of your dreams.