At first glance, distressed properties for sale can seem like an unnecessary risk. However, with the right knowledge and the help of experienced property practitioners, it can be a lucrative investment opportunity that offers fantastic returns.
The term “distressed properties” refers to properties that are either facing repossession, resale or auction due to the current owner’s inability to make their home loan repayments.
How to buy a distressed property in South Africa
All distressed properties have one thing in common: their owner has encountered financial challenges and has defaulted on payments. While the banks are keen to find fair solutions in these situations, they need to take action to protect their interests. There are three different types of distressed properties: bank-mandated sales, sales in execution and properties in possession.
Depending on which type of property you choose to buy, you will either enter into the transaction the usual way, through a property practitioner, or you will attend a property auction. Using the wide array of property investment tools on offer, you can find a distressed property on the market and calculate how much you can afford to pay.
A bank-mandated sale takes place when a homeowner voluntarily hands over his or her property to be sold because they cannot keep up with the monthly repayments. The bank in turn appoints a property practitioner to find a buyer, and these properties typically sell at fairly standard market prices.
A sale in execution takes place when the bank takes action after a homeowner consistently defaults on their bond repayments. The bank will secure a judgement against the homeowner, and the sheriff of the court will then auction whatever movable assets the homeowner has. If the proceeds of this do not cover the arrears, the property itself will be auctioned. To protect the homeowner, a minimum reserve price will be set by the bank before every auction.
A property dubbed is “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, thereby “repossessing” it. To make an offer on such a property, you’ll need to liaise with the property practitioner appointed by the bank. It is most likely in these cases that you will see lower prices and lower offers being accepted.
Why invest in distressed assets?
The key benefit of investing in distressed assets is that such properties are often sold at incredibly low prices, below market value. Investors therefore have an opportunity to enjoy significant capital growth potential over the long term, as well as rental income in the short term. For example, for just R2 300 000, you can invest in a stunning unit with all the bells and whistles in the sought-after Ballito Hills Lifestyle Estate.
While a distressed property can be a great investment, you need to go in with your eyes open and be fully aware of the pros and cons.
Pros and cons of investing in distressed properties
Like most real estate transactions, buying distressed properties comes with a unique list of pros and cons. On the plus side, you’re likely to find exceptional bargains, and areas that you may have been otherwise unable to afford could become possibilities. There’s also an opportunity to get a quick return on your investment if you can resell the property fairly quickly at prevailing market prices.
Factors to be careful of include the fact that distressed properties are sold “voetstoots” and it stands to reason that if the previous owners fell behind on their home loan payments, they may also have fallen behind on home maintenance. In some circumstances, the buyer can also be liable for outstanding rates, levies and taxes, so make sure you have all the information before you sign on the dotted line. It’s also important to ascertain whether the premises are currently vacant.
Buying a distressed property can be one of the best property investment tips you ever get - if you make your investment wisely with the help of a property practitioner or industry expert. Get in touch with Seeff for more information about distressed properties.
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