Mortgagee Sales. This session will focus on what: an FSP must do if it takes possession of a borrower s home for sale

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2 Mortgagee Sales This session will focus on what: an FSP must do if it takes possession of a borrower s home for sale what FOS will take into account when considering a dispute over a mortgagee sale

3 Summary of the FOS Approach An FSP in possession of a borrower s property must take reasonable care to sell the property for either: it s market value; or the best possible price

4 Summary of the FOS Approach FOS will look at how the FSP: worked out the property s value marketed the property (advertising/inspections) repaired, maintained or improved its condition sold the property and set the sale price used the proceeds of the sale communicated with the borrowers

5 Summary of the FOS Approach Where FOS believes that the FSP did not take reasonable care, FOS may award the borrower compensation for the difference between: the sale price; and the market value of the property sold We will require the FSP to either: reduce the borrower s debt (if there is any left); or compensate the borrower by that amount

6 Reasonable Care If the property does not have a market value, the FSP must get the best price it reasonably can How? the FSP must oversee the sale and make important decisions at each stage of the process. the FSP can ask its marketing agent, valuer or property consultant what they suggest and rely on their expertise to make decisions Key information an FSP should supply to FOS: - copies of any valuation of the property it has obtained - copies of any property appraisals it has obtained

7 Reasonable Care It is not enough for an FSP to simply: leave a consultant to sell the property unsupervised aim to recover the amount of the borrower s debt without considering whether a higher price could be reached

8 Reasonable Care The FSP does not need to: consult the borrower about its decisions keep the borrower informed of progress The borrower cannot dictate how the property is marketed or sold, or what sale price will be acceptable The FSP must promptly tell the borrower how it used the sale proceeds If a borrower disputes the sale at FOS, FOS will: ask the FSP to supply information relating to the sale consider the FSP s actions and decisions

9 Marketing The FSP should get at least one marketing proposal from a reputable property agent The proposal will usually include recommendations on the: property s market value way to sell the property i.e. auction, private treaty, tender marketing and advertising strategy work needed to prepare the property for sale maintenance and repairs The proposal may also refer to potential problems the agent has identified, such as uncooperative tenants

10 Marketing If potential purchasers are not made aware that the property is for sale, the FSP may struggle to show how it has achieved market value at sale How a property is advertised and to what extent will depend on the location and type of the property Advertising will also be influenced by the recommendations of the FSPs valuer, property agent or property consultant

11 Marketing An advertising campaign may include: print ads (newspapers, agent brochures, window displays, real estate magazines) online ads ( or billboards at the property handbills or flyers contact with potential purchasers inspections (public/appointment)

12 Marketing Advertising should: accurately describe the property accurately describe the property s location detail any planning permissions and redevelopment opportunities the FSP is aware of

13 Marketing FOS considers the following to be appropriate: four (4) week advertising campaign (including on-line ads on and and inspections each week and on the auction day If the property is in a regional area, the FSP should also advertise a couple of times in a local newspaper If the property is commercial or unusual, the FSP should also advertise it in appropriate specialist publications

14 Marketing Whether advertising a property as a Mortgagee Sale impacts on the sale price will depend on the individual circumstances might attract more purchasers might suggest it will be sold cheap

15 Marketing Key information an FSP should supply to FOS: marketing proposal regular updates from its property agent about the campaign the property s agents file showing: the advertising schedule actual copies of the print and online ads published confirmation the ads were published in line with the advertising schedule details of inspections (number of parties, comments from interested parties, agents suggestions on offers received or opportunities to promote offers) - reports from its property agent about feedback from potential purchasers

16 Marketing FOS will use this information to confirm that the property was adequately described and marketed It allows FOS to test the market and get market value at sale

17 Maintaining/Improving the Property Generally, the FSP does not need to: spend money to improve the property find new tenants let existing tenants stay The FSP might need to pay for common maintenance issues such as: repairing broken windows repairing door locks to secure the property cleaning, gardening, lawn mowing repairing pool equipment fencing the pool (if required by law before it can be sold)

18 Maintaining/Improving the Property Other expenses may be reasonable depending on the circumstances renting furniture for a property in an affluent area Insurance usually an FSP will insure the property when it takes possession where there is a risk of vandals or squatters, the FSP might also hire a security service so it can market the property in a presentable condition

19 Maintaining/Improving the Property Key information an FSP should supply to FOS: Receipts for all expenses it incurred to maintain/improve the property (where it took payment out of the sale proceeds) FOS will consider whether those expenses were reasonable for the FSP to obtain market value

20 Selling the Property The FSP may decide how to sell the property However, FOS considers that an auction is the most appropriate option unless the FSP s experts have recommended another approach

21 Selling the property Where the FSP s experts recommend a private sale, the FSP must take care with marketing and advertising the FSP must be able to show that it brought the property to the attention of potential purchasers; and achieved market value If not sold by auction, the FSP must give FOS: written proof the selling agent recommended that the property be sold other than by auction reasons why

22 Selling the property Setting the Reserve Price the FSP should consider all available information including valuations, marketing reports and previous offers where the advertising specifies a price, the FSP will need to be satisfied that the price is appropriate having regard to: its valuation the property agent s advice

23 Sale Proceeds The FSP must explain to the borrower what it has used the sale proceeds for It should do this after the sale has been completed Where there is a shortfall debt, it should do this before commencing collection activity

24 Sale Proceeds The FSP may use the sale proceeds to: reduce or pay out the debt owed to it and any other creditor with a mortgage over the property pay reasonable costs it incurs in taking possession of, maintaining and selling the property

25 Sale Proceeds Where there is a surplus and the borrower has no other loans, the FSP should pay the surplus to the borrower The FSP should not keep a surplus even where the borrower has threatened to take legal action and the loan contract/mortgage says it can hold money in case of legal costs Subject to the terms of the loan contract, the FSP may use any surplus to reduce the balance of other loans the borrower has with the FSP

26 Sale Proceeds Reasonable costs incurred in taking possession and selling the property: security (changing locks) insurance maintenance (cleaning, gardening, mowing) advertising and sale (property agent s fees) If a property consultant is engaged, the FSP will need to show that they added value to the process (not merely an intermediary between the FSP and service providers)

27 Sale Proceeds The loan contract or mortgage will usually allow the FSP to recover reasonable and proper legal costs for: serving default notices serving demands or other notices taking court proceedings The FSP may not recover any more than it paid to its lawyers

28 Sale Proceeds FSP will be entitled to a tax credit for 75% of the GST charged by the lawyers when seeking possession The benefit of this tax credit must be taken into account when the FSP deducts its legal costs from the sale proceeds (even if it chooses not to claim the credit from the ATO)

29 Sale Proceeds Key information an FSP should supply to FOS: Invoices for all costs taken from the sale proceeds property agent s fees costs of advertising costs of maintenance Lawyer s bills FOS does not consider these to be confidential even if the FSP claims legal professional privilege

30 Case Study One In August 2008 the Applicant obtained a loan for $540,000 to purchase a property for $750,000 In February 2012 the FSP took possession of the property On 27 February 2012, the FSP obtained a certified valuation - $445,000 The property went to auction on 16 April 2012 but was passed in On 17 May 2012, the FSP obtained a further certified valuation - $385,000 The FSP sold the property for $325,000. After sale of the property there was a shortfall debt The Applicant said: the FSP undersold the property given that he had purchased it for $750,000 only three years earlier The FSP said: it took reasonable steps to achieve the best result in selling the property. The FSP also said that the Applicant paid more than market value when he purchased the property in 2009 WHAT INFORMATION SHOULD THE FSP PROVIDE TO FOS TO ASSIST IT WITH ITS INVESTIGATION?

31 Case Study One Key information to be provided to FOS copies of any valuations the advertising schedule agent s file details of inspections actual copies of the print and online ads published confirmation the ads were published in line with the advertising schedule copies of billboards at the property handbills or flyers reports from its property agent about feedback from potential purchasers

32 Case Study One Outcome FOS found that the FSP did not adequately advertise the property. Accordingly, the failed and inadequately advertised auction could not be construed as a test of the market The FSP did not keep a copy of the internet advertising it could not show how long the property was advertised for or how the ads described it The FSP could not show that the property was advertised in the newspaper for any longer than three weeks Given the FSP s conduct and the declining market, FOS was not satisfied that its failure to adequately advertise the property led to a sale at less than market value

33 Case Study Two In 2003 the Applicants obtained a loan to purchase a property In December 2010, the FSP sold the property as mortgagee in possession for $50,000 at auction, leaving a shortfall debt of $46,419 The Applicants said: the FSP sold the property for less then market value given that: in 2007, the property s market value was approx. $110,000 the FSP valued the property at $150,000 and $70,000 a third party offered to buy the property in December 2010 for $160,000 The FSP said: it appointed a real estate agent to market and sell the property. The property was sold at auction for its market value after conducting a marketing and advertising campaign. WHAT INFORMATION SHOULD THE FSP PROVIDE TO FOS TO ASSIST IT WITH ITS INVESTIGATION?

34 Case Study Two Key information to give to FOS valuations (including drive by valuations) reserve price set by the FSP (including any fall back price) real estate agent property report reports from its property agent about feedback from potential purchasers agency agreements entered into with real estate agents FSP s mortgagee sales policy property s agents file (including advertising schedule, details of inspections, copies of print and on-line ads published, confirmation ads were published in line with advertising schedule, copies of billboards, handbills/flyers) copies of correspondence between the borrowers and the FSP information to show that the FSP explained to the borrower what it used the sale proceeds for copies of Lawyer s bills

35 Case Study Two Outcome FOS was not satisfied that the FSP had met its obligations to take reasonable steps to determine the value of the property it was not clear whether the FSP looked into the discrepancy between the valuations The FSP did not take reasonable care when it set the reserve price because it relied solely on: a property agent s valuation in April 2010 of $70,000 a drive-by valuation in May 2010 of $70,000 a property agent s report valuing the land between $50,000 and $60,000 a small number of enquiries in the four week marketing campaign

36 Case Study Two Outcome FOS determined the land s value was $91,666 the average of: FSP s lower valuation an independent retrospective valuation obtained by FOS a confirmed offer of $150,000 received by the Applicants the week before the auction The Applicants were liable to the FSP for a shortfall debt of $2,334 loan at the time of the sale was $87,500 net sale proceeds would have been $85,166