Buying from a mortgagee in possession in Queensland

What a mortgagee in possession sale is

When a borrower defaults and the default is not remedied, a lender can take possession of the security property and sell it under its power of sale in the mortgage and under the Property Law Act. The registered owner's name stays on the title until settlement, but the lender signs the contract and controls the sale.

For regulated home loans the process is not quick. The lender must issue a default notice under the National Credit Code giving at least 30 days to remedy, and for owner-occupied homes proceedings for possession usually follow before a sale can proceed. That sequence is why enforcement sales trail the economic conditions that cause them.

• Default notice under the National Credit Code, usually 30 days to remedy
• Possession obtained by agreement, by warrant, or through the court
• Property marketed by an agent appointed by the lender, often disclosed as a mortgagee sale
• Lender signs the contract in exercise of its power of sale
• Proceeds applied to enforcement costs, then the first mortgage, then later interests

What it means for the property owner

It means losing control of the price, the agent, the timing and the process — and still owing whatever is left. The lender must take reasonable care to obtain the market value of the property, a duty imposed by section 85 of the Property Law Act that cannot be contracted out of. That is a real protection, but it is not the same as achieving the best price a motivated owner with time on their side would get.

Enforcement costs, legal fees, agent's commission and interest are all added to the debt and paid out of the proceeds first. Any surplus goes to later mortgagees and then the owner. Any shortfall remains a personal debt of the borrower, and any guarantor stays exposed for it.

The practical message for an owner heading in this direction is that almost every outcome is better if they act early. A hardship variation under the National Credit Code, a controlled sale with the lender's consent, refinancing, or a short payout negotiated before possession will nearly always beat a mortgagee sale. The window to negotiate closes as enforcement escalates.

• The lender chooses the agent, the marketing and the price
• Enforcement and legal costs are added to the debt
• Any shortfall survives the sale as an unsecured debt, and guarantors remain liable
• A default listing on the credit file typically lasts five years
• An owner can still challenge a sale that breaches the duty to take reasonable care to obtain market value

What it means for the buyer

A mortgagee sale can be good value, but the price reflects the risk transfer. The lender has never lived in the property and will not warrant anything about it. Expect the standard REIQ contract to be heavily amended by special conditions that strip out warranties and shift risk onto the buyer.

The most common changes: no warranty as to the state of the property, the fixtures or the improvements; no warranty that structures were built with approval; the property sold strictly as is, where is, with no right to object to defects or to unapproved building work; disclosure obligations limited to what the lender actually knows, which is often nothing; and no right to delay settlement or claim compensation for matters the lender cannot answer.

There are also practical problems that do not arise in an ordinary sale. Access for a building and pest inspection may be limited if the former owner is still in occupation. Chattels listed in the contract may have been removed. Pool fencing may be non-compliant with no certificate available. Body corporate levies may be badly in arrears. Occasionally the former owner is still in the property at settlement, and vacant possession becomes the buyer's problem unless the contract says otherwise.

• No warranties on condition, compliance or approvals — as is, where is
• Limited or no seller disclosure, because the lender genuinely does not know
• Restricted rights to terminate or claim compensation for defects
• Possible unapproved building work, missing pool certificate or removed chattels
• Vacant possession and eviction risk if the former owner remains in occupation
• Deposit and settlement terms usually drafted firmly in the lender's favour

The protections a buyer does keep

It is not all one way. Title passes free of the mortgage and of interests registered after it, because the transfer is made in exercise of the power of sale and the registrar removes the subsequent encumbrances. The lender's duty to obtain market value operates in the background as a check on a sale at an obviously undervalued price. Transfer duty concessions are unaffected by the fact it is a mortgagee sale, and first home buyers keep their entitlements.

Cooling off still applies to a residential contract that is not sold at auction, though many mortgagee sales are taken to auction precisely because that removes it.

How we help — buyers

The work on a mortgagee purchase is in the contract review, not the settlement. Every special condition has to be read against what the buyer is actually giving up, and the searches have to do the job the seller's disclosure would normally do.

• Free contract review before you sign, with the amended special conditions explained in plain English
• Negotiate back what can be negotiated: a workable building and pest condition, a finance condition, access for inspections, and vacant possession at settlement
• Order the searches that substitute for missing disclosure — title, council building records and approvals, pool safety register, contaminated land, flood and planning, body corporate records for a unit
• Check the pool safety and smoke alarm position, and price the compliance work into the decision rather than discovering it after settlement
• Confirm the lender's authority to sell and that the transfer will be given in exercise of the power of sale, so the title comes to you clean
• Advise on transfer duty and any concession, and set a realistic settlement date given lender approval timelines
• Manage the electronic settlement and confirm possession arrangements on the day

How we help — owners facing enforcement

If a default notice has arrived, there is usually still room to move. We review the notice for validity, deal with the lender in writing, apply for a hardship variation where the borrower qualifies, and where a sale is inevitable, negotiate the lender's consent to a controlled sale so the owner keeps the agent, the marketing and the price. Where the debt will not be cleared, we negotiate the residual position and the guarantors' exposure at the same time, rather than leaving it to be pursued later.

Where a mortgagee sale has already happened at a price that looks well under market, we can review whether the lender met its duty under section 85 and whether the surplus has been properly accounted for.

Mortgagee in possession sales in Queensland — common questions