Distressed Sales

What is a distress sale:

A distress sale refers to the urgent and forced selling of a property, often but not necessarily at a significantly reduced price, due to financial difficulties, or unforeseen circumstances. When a homeowner is finding difficulty paying their home loan re-payments the seller has the option to join the banks assisted sales programme before the bank can take legal action against them.

Essentially there are 3 kinds of Distressed properties that the banks work with:

• Bank-mandated sales
• sales in execution
• properties in possession.

Each of these options have a different purchasing process and benefit for a buyer. Unfortunately for a seller this may mean this is their last resort as they are unable to keep up with their bond repayments, and is the only way for the bank to regain their losses.

Bank mandated sale (Voluntary option)

A bank mandated sale is a favourable option for a seller who is unable to keep up with the monthly bond repayments. They can voluntarily hand over the property to the bank to sell on their behalf and will be sold as a normal transfer. Keep in mind the processes of a bank mandated transfer may differ compared to a usual transfer, because of this the transfer may take longer to register.

In South Africa our four commercial banks Standard Bank, ABSA, Nedbank and FNB all have bank assisted programmes to assist clients that find themselves in such situations.

Bank-mandated sales are generally valued at market-related prices and not at a reduced price. This is an advantage to the seller as they may still make a profit after the bank’s account has been settled depending on what was owed to the bank.

The process is simple, the seller signs a mandate with the bank directly to sell the property, who in turn appoints an estate agent from their panel of agencies to assist in the sale of the property. When an offer has been accepted the bank then appoints their own Conveyancing Attorneys on their panel to assist in the Transfer of the property. 

The seller has the right to decline any offer to purchase, although if they refuse or are unable to sell the property within the mandated time, the respective bank may step in to request the seller to reconsider any favourable offer presented to them or the bank may eventually initiate legal proceedings.

Advantages of Bank Mandated Sales;

• Can reach a higher selling price. As the property is marketed at market related prices and not on a distress value
• Any profit which may have been made on the sale of the property after settling your home loan debt and associated costs, will belong to you.
• the seller stays in control of the sale of the property, and can decline a offer
• rates and taxes (including arrears) will be paid from the proceeds of the sale of the property.
• Reputable estate agency and attorney to manage the marketing and conveyancing process.
• A discount may be applied on the remaining shortfall after the sale of your property if any.
• No adverse credit bureau listing (seller can still buy or rent)
• Seller to sign a AOD with the bank should there be a shortfall and is repayable over a period of up to 10 years, interest free.

Sale in execution – (Involuntary)

• Definition: A sale in execution takes place when creditors more so banks proceed to take legal action of selling a property or assets to pay off a debt. If a homeowner consistently defaults on their mortgage payments, the bank can obtain a judgment against them. If the debt is still not recovered the Sherriff, then attaches the property to be auctioned off.

• Disadvantages for seller: 

• Apart from losing your home, the homeowners credit record will be tarnished.

• Your property will be sold for lessor than its actual market value

• You will be liable for the legal costs

• No discount on your shortfall (amount still owed to the bank)

Property In possession: (Involuntary)

• Definition: A property “in possession” if it has failed to reach its minimum reserve at auction or did not sell with a bank mandate. In cases like this, the bank buys the property i.e.: “repossessing” it. To make an offer on such a property, you’ll need to liaise with the property practitioner appointed by the bank.

• Disadvantages for seller:
• With a repossessed property the bank becomes the legal registers owner of your property
• Emotional stress for a homeowner, especially if they are still occupying the property and the auction process is under way
• Property is sold at a lower price, as the banks main objective is to recover their losses