Buying a mortgagee in possession property – what you need to know

Mortgagee in possession sales, which are sometimes also known as distressed sales of foreclosure sales, are where a bank or mortgage lender sells a property that it repossessed when the homeowner could not pay their home loan. It’s sometimes possible to snap these properties up at bargain prices, though this may not be easy, and these properties come with their own share of risks for buyers. 

How does a property end up sold as a mortgagee in possession?

Home loans in Australia are typically secured by the value of the property being purchased. If a borrower can no longer afford their home loan repayments, the lender can repossess the home and sell it to recover the rest of the money that’s owed.

The process of going from missing a payment to a mortgagee in possession sale typically goes something like this:

1. A borrower misses a mortgage payment
2. The lender sends a reminder notice
3. The borrower does not respond and the lender can’t contact them
4. The lender serves a default notice, giving a 30-day deadline to make the missed payment
5. The borrower does not repay the default
6. The lender goes to court to declare mortgagee in possession
7. The borrower does not file a successful defence
8. The lender evicts the borrower and takes possession of the property

Are mortgagee in possession sales the same as distressed property sales or foreclosure sales?

While ‘distressed property’ ,‘foreclosure’ and ‘mortgagee in possession’ are sometimes used interchangeably, there are some important differences between them.

In a distressed property sale, the property is still owned by the borrower, not by the bank. Typically this is a situation where the home owner is experiencing financial stress and can no longer afford to pay the mortgage, but intends to sell the property to help get their finances back on track.

In a mortgage in possession sale, the homeowner has already defaulted on their loan and the mortgage provider has already repossessed the home. While the borrower’s name will still be on the title, the bank is legally allowed to sell the home to pay off the mortgage. 

Alternatively, the lender could choose to transfer the property’s title from the borrower to itself, which is known as foreclosure. In Australia, most banks prefer to opt for repossession over foreclosure.

Can you buy a mortgagee in possession property for cheap?

It’s easy to think that you may be able to bag a bargain by snapping up a property being sold mortgagee in possession. After all, the lender may want to offload the property as quickly as possible so it can recover the money it’s owed.

However, this may not always be the case. A lender is obliged to conduct the proper due diligence when selling a repossessed property like this, including conducting a marketing campaign and taking the appropriate steps to secure the best possible price. This means that these properties are often sold via auction - depending on the property’s location and demand from other buyers, it’s possible that a mortgagee in possession auction could see the property go under the hammer at auction for more than you expect.

What are the risks of buying a mortgagee in possession property?

Mortgagee in possession properties are often sold ‘as-is’. In some cases, if a homeowner has neglected their mortgage, they may have also neglected their property, leaving important maintenance and repairs incomplete. Even if you bought one of these properties for around market price, you may still need to pay for repairs or even renovations.

Also, because these properties have been repossessed by the bank, their legal status can sometimes be more complex than other properties. This could lead to delays in the conveyancing process and your solicitor spending more billable hours unravelling title disputes and complications.

How to find mortgagee in possession properties

Mortgagee in possession sales tend to be relatively uncommon compared to other property sales in Australia. For example, according to SQM Research, out of the 253,327 homes sold across Australia in October 2024, 5251 were distressed listings.

If you’re still keen to try and snap up a mortgagee in possession property, you can keep a close eye on real estate listings and conduct regular online searches for mortgagee in possession sales and/or distressed properties. You could also consider getting in touch with a real estate agency that specialises in mortgagee in possession sales and similar distressed properties.

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