A "For Sale" sign stands in front of a house. If you are planning to buy
a home or land that has been repossessed by the lender after the owner
defaulted on loan payment, then know the benefits, risks and
challenges involved. PHOTO | FILE| NATION MEDIA GROUP
When Titus Wekesa had a medical emergency two years ago at a
time he was broke, he had no option but to borrow from a bank in Kitale,
where he resides.
The bank agreed to lend him Sh400,000 as he used the title deed for his half-acre as collateral.
A
year after the lapse of the period in which Mr Wekesa ought to have
completed repaying the loan, the bank tired of trying to trace him,
moved to sell the piece of land to recoup the amount it was owed plus
interest.
Mr Wekesa, who surfaced later, had no option but to let the bank sell the property to offset the debt he owed them.
Two
months down the line, Joseph Ominde from Kakamega bought Wekesa’s land
from the bank at Sh350,000, a lower price than even himself had
anticipated. In his words, the land which hosted a disused stone house
was sold at a throw away price.
Ominde is currently revamping the building on the land. He intends to turn it into a shop, which he will let for monthly rent.
As
the real estate industry grows, some investors have found it better to
explore into this realm, acquiring distressed property for their own use
or for leasing purposes at cheaper prices.
However,
for an investor who intends to save money on such properties’
acquisition; after bearing considerable expenses on renovations and
maintenances, pre-foreclosed and foreclosed properties, which are
sometimes called real estate owned (REO) property, are a more fitting
investment. Mr Felix Onyango, the chief executive officer of Dominion
Valuers Ltd, a Nairobi-based real estate consultancy firm, and also an
advisor and property valuer, describes foreclosed properties as those
that are put up for sale by a lender in a bid to recoup a loan on which
the property was put as security by a borrower.
Foreclosure
is the entire legal process that permits a lender to take complete
custody of and sell these properties due to defaulting and non-payment
of the loan by the involved borrower.
This
happens when the debtor stops making payments as per a pre-arranged
agreement and still yet, does not offer any details or communication on
why they are not keen on making the repayments of mortgages, taxes or
credits upon which their property acted as indemnity.
'NORMAL'
Mr
Onyango notes that it is normal for these properties to be dilapidated
and distressed because they are left abandoned as their owners, due to
lack of means and also the property’s imminent foreclosure and ultimate
seizure by the lender, tend to disregard their maintenance.
“Sometimes,
out of bitterness, the property owners deliberately neglect the
property and hence leave it in a poor state,” says the real estate
valuer.
However, a smart
investor can take advantage of these events, by purchasing the property,
doing minor refurbishments and turning it into a worthwhile investment
with the end-product every so often being a worthy one.
“The
most common ways of buying pre-foreclosed or foreclosed properties are
through a real estate agent or at a public auction, and while these
properties are often deemed inexpensive, with many often sold at
below-open market rates, the buyer should keenly observe due diligence
to ensure their investment does not yield financial losses,” advises Mr
Onyango.
For starters,
pre-foreclosure sale is also commonly called a short-sale, and the owner
is required to leave the property after signing the short-sale
agreement with the lender and its eventual sale.
During
pre-foreclosure, the property owner, however, still has some control of
the property. But because they have ceased being able to make timely
payments, they may negotiate with the lender to facilitate sale of the
property at usually not more than 75 per cent of its open market price
to clear their debt.
Factors such
as job layoffs and terminations, and emerging demands for cash could
cause one’s real-property to fall into pre-foreclosure and eventually
foreclosure, according to real estate experts.
However,
it is the defaulting, non-communication by the property owners and
probably cutting of ties with the lender that hastens the foreclosure of
their property, according to Robert Simiyu, another realtor and the
head of Nairobi Best Homes, a constituent subdivision of the Nairobi
based real-estate consultancy firm, Villa Care Ltd.
Mr
Simiyu says while different lenders have their own grace periods for
their debtors between the start of the borrower’s defaulting to the
actual foreclosure period, many of these reprieve periods commonly range
between four to six months.
It is
soon after the lapse of this grace period that the prospective buyer
can make a purchase bid for the property while still in its
pre-foreclosure state.
PURCHASE BID
The
owner has to agree with the lender to sell the property at a price
closer to the balance of the loan as this helps to quickly sell it to
avoid getting to foreclosure stage, where the owner loses control over
it and the lender gets sole decision-making rights over the property.
An
advantage to the buyer is that purchase at this stage translates to a
discount for the purchaser. By extension, it also helps the lender to
avoid costs usually involved in the often more bureaucratic foreclosure
process.
Despite currently not
being a widely used approach in the country’s property sector, buying
pre or foreclosed property comes with benefits just as well as it comes
with its few downsides, according to Mr Simiyu.
He
notes that it is as propitious as it is a chancy gamble and the buyer
must always be diligent enough to ensure it ends up as a profitable
bet.
“It has benefits such as one
may be able to purchase a property at a much lower price, especially if
it is in pre-foreclosure stage where its owner could be rushing to sell
it quickly before it goes into foreclosure, where the lender will take
the property’s full control,” says Mr Simiyu.
He
says the fact that the owner is hasty to sell the property puts the
prospective buyers at an advantage as they get a considerable sway in
pitching a bargaining price.
Banking
institutions and loaners are also often willing to offer such
properties at a discount as the longer they hold onto them, the more it
costs in maintenance expenses and any other arising taxes.
Similarly,
foreclosures can be found at all class levels with pricing points
ranging from starters, for those who are new to the strategy and possess
minimal finances, to luxury homes and properties for the affluent, who
are well-versed in the approach.
Sometimes
some of these properties just need minor repairs or improvements to be
as good as new. And with these done, an investor can successfully turn a
distressed foreclosure into an admirable property.
CHALLENGES
However,
snags in this approach may handicap a prospective investor. Due to the
fact that foreclosures are often offered at considerable discounts, the
buyers may find themselves contending with stiff competition and
biddings from other interested purchasers, with the increased demand in
turn inflating the property’s price.
Contrary
to norm, some adamant pre-foreclosure owners may offer much lower
discounts for their properties, with others also tending to offer
exaggerated prices in the hope of earning more profit from the sale.
And
since lenders wish to recoup at least what they are owed from the
property, they sometimes may offer only a slim discount to ensure that
what the property sells for fully recovers their loan and additional
expenses they incurred in the foreclosure proceedings.
Foreclosed
properties may be traded at an auction and an investor buying such
property will be required to pay for it immediately. In this short time,
one may not have fully inspected the property before making the
purchase hence risks ending up with a substandard investment or probably
one that he/she doesn’t like.
Some
of these foreclosures could occasionally need expensive repairs as the
previous owner might not have afforded their fixes. Further, vandalism
and burgling on such seemingly uninhabited properties may have made them
worse. Also, the longer a property remains in disuse demands more
renovation and maintenance.
After
purchase, sometimes the buyers find themselves having to evict the
former owners, who may out of frustration damage the then mete their
frustration on the property by damaging some of its components.
“Depending
on the community where the property is, especially the close-knit ones,
neighbours will tend to be hostile towards the buyer, regarding him/her
an intruder, who took advantage of the misfortune of one of their own
and acquired their property. The buyer will find it hard to settle in
the neighbourhood especially if he/she has to live there,” says Mr
Onyango.
The buyer is also
sometimes required to help pay the additional fees that may arise in
foreclosures’ legal proceedings, with the bureaucratic processes
involved being sometimes lengthy and time consuming.
Some
foreclosures tend to have liens attached to them, and after purchase,
the buyers find themselves having to pay old arrears associated with the
property especially with the lenders often not keen on footing the
additional charges.
The best part,
however, is that if the investor has the resolve to counter these
snags, he/she will realise that foreclosures could be among the best
properties one can acquire at economical costs.
There
is good profit in foreclosed properties, but an ingenious investor
should know what they are getting into beforehand and choose the real
property cautiously, according to Mr Simiyu.
“During
the properties’ purchase, in many cases only one real estate agent is
involved, who is usually from the property seller’s side. If the buyer
doesn’t have ready cash, he/she requires a preapproval document from a
lending institution to enable the transaction to proceed. There is also
little, if any, room for bargaining and negotiations, and the property
comes as it is, hence the buyer pays for the necessary repairs,” Mr
Simiyu says.
It is thus safe to
find a real estate agent who is knowledgeable in the intricacies of the
foreclosure market, according to Mr Onyango. “As a buyer, whether you
choose pre-foreclosure or foreclosures, always involve a professional.
The support of experienced specialists such as real-estate agents and
lawyers is vital,” says Mr Onyango.
PRIOR ASSESSMENT
The
realtors also advise a buyer to not disregard a comprehensive
inspection of the property beforehand because once a deal is done and
payment made, there is no going back.
Disregarding
prior inspection of the property often leaves the buyer discontented on
later realising that the property measures lesser than his/her
expectations and money’s value.
Mr
Onyango says discounting the inspection could leave the buyer with a
property whose refurbishment and maintenance is overwhelming after the
foreclosure deal. “Whether very high or low, the cost of repairs
naturally shifts to the buyer after the transaction is complete, which
sums up why you should strive to protect yourself,” he adds.
Prior
assessment of the property is encouraged as it also helps in
determining its sale condition, its estimated cost of repairs hence a
fair and reasonable price offer, and also the funding of the purchase.
The
buyers should also demand title documents for the real estate to ensure
they are up-to-date with all matters that pertain the property they
eye.
Ensure you involve property
registration authorities to especially verify that the property has no
outstanding previous liens as well as confirm that the title deeds are
accurate and updated.
“There may
be liens on the property or its title documents, which may not be
noticed until the foreclosing process begins. These could muddle the
transaction. So, always make a contextual verification of the property’s
details and sale,” says Mr Onyango adding that at this point, a real
estate lawyer and a property expert who is proficient in foreclosure
transactions are an invaluable resource.
***
MAKE PRIOR ARRANGEMENTS FOR FUNDING
Ensure
you have the required amount of money to meet the cost of purchasing
the property as the competitive nature of these usually low-priced
properties may attract many buyers and without the money ready, the
property will most likely be bought by another buyer.
Experts
recommend making sure prior arrangements for funding the purchase are
in place even before embarking on hunting for the property.
“Make
sure that you get an up-to-date pre-approval document from a financier,
which details how much money you can borrow, based on their assessment
of your past credit scores and income, if you feel you cannot
exclusively fund the purchase” says Mr Simiyu.
For
a home in which the buyer wants to stay in, check that it is in a safe
neighbourhood where you will be comfortable living. Ensure there are
basic amenities and also that neighbours are people one can well relate
with. An unsafe neighbourhood is unpleasant to live in and usually
increases the risks of vandalism on the property particularly during the
transaction processes. This increases the would-be-buyers’ repair and
maintenance costs.
The property
experts additionally advise that one shouldn’t disregard the
fundamentals that make a property fitting just because its listed
purchasing price is a bargain. They also put emphasis on involving an
expert in the entirety of the processes involved, the significance of
researching on the property, and following due diligence.
Ensure
you involve property registration authorities to especially verify that
the property has no outstanding previous liens as well as confirm that
the title deeds are accurate and updated.
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