What happens if the money owed by the previous owner is more than current market value? LVR of over 100%
Eg:
Mortgage of $780,000
Property currently valued $730,000 to $750,000
Reserve most likely set at $800,000 ($780,000 + $20,000 agents fees)
Property passed in at $740,000.The bank could then put it up for private sale at $800,000 which is highly unlikely to sell.
At what point, and how, will a bank decide to take a hit on this transaction rather than wait indefinately for $800,000 at private sale?
Is some method used to work out how far they will negotiate???Come on people !
Someone must have some experience in this situation……….
Hi Jazz77,
All I know is that in NSW the bank legally has a responsibility to get market value for the property which is why you don't get a 'bargain' like you would in America (for example) where people get expensive houses very cheap. If the bank sold significantly under market value then they are in deep water legally.
Correct ygue. But at some stage the bank has to sell it. If you are interested, let your bid be known. Revisit them and see how it's going, letting them know your offer still stands. Doesn't sound like you'll get a bargain though if value is close to the reserve. You never know though.
They may get desperate. And they will chase the previous owner for the difference (unlike in America).Catalyst wrote:Correct ygue. But at some stage the bank has to sell it. If you are interested, let your bid be known. Revisit them and see how it's going, letting them know your offer still stands. Doesn't sound like you'll get a bargain though if value is close to the reserve. You never know though.
They may get desperate. And they will chase the previous owner for the difference (unlike in America).I agree, at some point it must be sold, the longer it takes the more it costs them, and this property is bound to attract vandalism due to its location.
The previous owner in this case is bankrupt.
What I would like to know is what to expect if its passed in on my bid of say 730k, I am fairly certain the reserve is $780k. Will they most likely stick to their guns and put it to private sale if i dont go to $780k exactly. Or is there some sort of magic system they use to calculate their potential lose if they sit on it any longer? Therefore my max offer should be $780k less the magic figure.
Make sense?
At those sorts of figures the bank would have protected its interest via Mortgage Insurance. The bank’s exposure would be any shortfall between the insured value (80-105%) and the final net selling price achieved. The insurer would stand to lose the most, esp if they can’t recoup from the mortgagor. (Correct me if I’m wrong).
I've seen quite a few go on the market at the reserve (sometimes higher) because 70% of people don't like auctions so there is a chance they ill get it in the open market. Just keep your eye on it.
Its just a commercial decision. Bank would probably sell at market value and make a claim for any shortfall on LMI. LMI will lose out as they couldn't pursue the vendor or previous owner as he is bankrupt. This is what they charge their huge fees for.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks everyone.
I hadn't even thought of the whole LMI side of the equation.
So in summary:
Attempts to get a fair market value has been satisfied as the bank went to auction.
The bank has final say on the price and the LMI makes up the difference.So would it be fair to say the LMI aspect would make the bank more likely to negotiate below reserve? As its the Insurer that has to make up the differance.
I received this today from a friend in the real estate industry.
=========================================================Yes, the bank will generally have sworn valuations done to ascertain a fair reserve price normally conservative and will just write off the loss. if the bids on the day do not hit the reserve which is normally reasonable there will be a representative there on the day to make an executive decision if it is close.
If it is not close, the will re-order new valuations and adjust asking price.
=========================================================My bank is doing its own valuation on the property. Would it be a good idea to take this valuation to the auction to use when negotiating? Would it be taken as being independant?
If the LMI is going to cover the banks loss, is the banks main concern to show they have tried to get a fair market price to prevent any repurcussions from the previous owner?
Once they have established that they have made attempts to get a fair price , they will then get their money anyway from the LMI. This would lead me to think that if the auction is passed in and it becomes clear negotiations have stalled on a figure, will they just sell and then go to the LMI for their balance?
Am I missing something.
Hi Jazz,
The reason LMI applies on loans over 80% LVR, is because 80% of the property purchase price is considered the acceptable risk for a lender to be able to sell the property at, and recoup the loan. Any higher is simply put, too risky to assume a sale within a reasonable time frame.
You will also find that by the time a property goes to mortgagee sale, it has been many months, if not years since the bank or lender (non banks or credit unions are much more ruthless than the banks trying to get their money back) has received any repayments at all from the borrower, and interest has been capitalising this whole time.
The bank or lender will obviously meet the market eventually as you suggest, btu cannot give it away.
How LMI works, but only if the original purchaser/borrower did borrow more then 80% of the property funds (which if they did not, their is no LMI in the case of most banks, but there is for the majority of non bank lenders…..maybe you can find out the mortgagee?) is that the LMI company will then pay the lender the difference between the loan remaining and the sale price – THEN the LMI company pursues the borrower for payment afterwards. Interestingly, if they can get an installment plan they dont charge any interest, but just want to get the money back at some stage.
It may be a case of the property has simply gone down, and the mortgagor had 'negative equity'.
I had a person today tell me their place is worth $525, he bought it early 2010 for $495k, and valuer reckons its worth $430-$440k based on recent sales. His loan is around $400k still so you can see how things can get messy.
All the best with the proposed purchase. Make a written offer to the real estate agent….they have to pass it on and it will definately be considered by the lenders recovery operations area.Cheers
Cheers
Thanks V8ghia,
Brief summary below:
The mortgagee is commonwealth bank.
The debt is 760k + agent fees on sale.
The previous owner believes it was worth 900k a few years ago (I dont know if this was the banks valuation or his own guess, knowing the area it was possible this was true back then)
Based on those figures 760k/900k = 84%, This would make me think LMI may have been necessary.
Previous owner is bankrupt.An independant agent who is very familiar with the area has advised me the property is very unlikely to go past low to mid $700k at best, in the current market, which is less than the mortgage but is a fair market price at the moment.
Hi – is this property Nepean Hwy Seaford Vic by any chance?
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