Repossessions – can being ethical pay?

As investors it’s obvious we are always looking for the best deal; the house that needs selling quickly, the seller who’s open to a hefty discount. And so we should be if we want to maximise the value-linked revenue potential over time. So there is one source of reliably cheap property which has always been available, but is now easier to find than ever, the repossession.

The owner has defaulted too often so the lender has called time, reclaimed the house and now wants to shift it fast even if it means selling way under market value.

But for some investors, this just doesn’t feel right. It’s too much like taking advantage of someone else’s misfortune. So what should those with a conscience do?

The supply of cheap houses from this source is growing and will continue to for as long as the country struggles to pull itself back from the credit crunch and recession. Should we just ignore this opportunity? Well, there is another way of looking at it, a way that should quell any ethical concerns you may have. And it’s all to do with making sure that everyone is a winner, not just you.

Let’s look first at what actually happens when a house is repossessed. As I said, the day arrives when the lender loses patience with payment defaults and takes the owner to court to begin a repossession process. Then, if the problem is unresolved, there is a second court appearance, usually after 28 days. And at this point, if the owner still can’t arrange satisfactory repayment, an eviction notice is issued.

Then on an appointed day the bailiffs do their unpleasant task, removing occupants and changing the locks. Finally the house is sold cut-price, but it’s not necessarily the end of the story for the ex-owner. If the arrears plus all repossession costs are not fully covered by the sale, the lender can chase the ex-owner for the balance for up to 12 years. Meanwhile the new owner is feeling very smug having secured a bargain.

OK, so it’s a grim process and therefore no surprise that many owners in this situation are very motivated to find an alternative way out. And there are plenty of owners facing this problem. Recent statistics from the Council of Mortgage Lenders suggest that a total of 40,000 homes will be repossessed this year alone, and the prediction for next year is higher at 45,000. So, you want to be ethical but you’re also frustrated by having to walk away from this rich source of properties – what can you do?

The answer is simple; offer to buy the house before the process reaches eviction and repossession. Yes, you still expect to get a really good deal, but the seller also benefits by avoiding everything from a ruined credit rating to the social stigma of being evicted. And the lender still gets the money back. So it really is ‘win-win’.

Here’s an illustration, based on a house worth £100k and with a mortgage of £70k. If repossessed, the costs will drive the total debt up, say, to £80k but in the depressed market the lender can only sell for £75k. So if they want to they can pursue the original owner for the shortfall for more than a decade. Now let’s see what happens if you step in and buy before this happens. Say you offer the same £75k; the owner accepts, pays off the mortgage, and walks away with £5k. Win-win.

Now, as a shrewd property investor looking for competitive prices you are already looking for motivated sellers, yes? Well, while some would-be bankrupts will always be in denial, there are plenty who would be over the moon if you helped them reach this ideal solution to their huge problem. So, when you’re networking or looking for people who rate certainty and speed of sale above their sale profit, why not add this group to your list? You can sleep well at night too!

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