Every so often, at a Property Networking event, I have someone come up to me and tell me that they are “interested in foreclosures”.
This normally indicates to me one thing – that they have been reading American books on property investment.
Nothing wrong with that, but In the UK, the law is quite different, and notably more on the side of “looking after the average person who falls behind on their mortgage” and less on the side of “whatever the contract said.”
The first thing to be aware of is that repossessions and foreclosures are different things.
- In a UK repossession, the mortgage company “take back” the house, sell it, use the proceeds to pay off the amounts owed to them, and then send the balance to the borrower. The old duty to take “reasonable care to ensure…. the best price that can reasonably be obtained” has been slightly modified in the Building Societies Act 1997 to “take reasonable precautions to obtain the true market value of the mortgaged property. It is normal, though NOT needed, for the mortgage company to get a Court Order to get a repossession. The mortgage company does NOT have to sell the property via an auction – indeed, the Courts have recognised that this may well not be the best way to obtain the true market value.
- In a foreclosure, by comparison, the mortgage company “take back” the house, sell it, and keep the entire proceeds. This is only possible as the result of a Court Order, and it’s nigh on unheard of for courts to grant this these days – normally they only ever grant repossession orders.
The second is that the big “hand the keys back myth” is just a myth.
- If you are behind on your mortgage payments, you cannot just “hand back the keys” and have the clock stop on the interest payments.
- A mate of mine was once a branch manager at a building society – on the day he took over the branch, he was shown a drawer containing about half-a-dozen sets of keys from people who had just brought them back, believing that this would stop interest accruing. I’ve no idea why this myth still abounds!
For the investor, the first two mean that, unlike in the US, it is very unusual for an investor to get a good deal simply by finding out which properties have been repossessed, and then buying them up cheap from the mortgage company for cash in hand.
The big market opportunities that do exist are finding people who MIGHT be repossessed, and negotiating deals with them that leave them better off than they might be if the repossession went through.