Recently the Australian Financial Complaints Authority (AFCA) released a series of guides outlining their approach to common complaints. This month we take a look at the AFCA approach to Mortgagee Sales.
Where a consumer (Borrower) is unable to repay a loan a Financial Service Provider (FSP) may elect to take possession of the property to sell it to reduce or payout the loan. AFCA have set out their guidelines as to what a FSP must do when it takes possession and what they will take into account if there is a complaint raised by the Borrower about the sale process -
The FSP must take reasonable care when it takes possession to ensure that the property is sold at its market value. The FSP does this by making important decisions at key milestones and oversees the entire sale process.
Consulting the Borrower
The FSP does not need to consult the Borrower about key decisions or the sales process nor is there an obligation to keep the Borrower informed as to the progress of the sale. There is however an obligation on the FSP to communicate to the Borrower when the sale is completed and how the sale proceeds have been used.
The FSP generally does not have to spend money to improve the property nor does it need to find new tenants or let existing tenants stay to make money prior to the sale. The FSP however may need to pay for common maintenance issues such as repairing broken windows or replacing locks to secure the property, cleaning, gardening or lawn mowing, repairing pool equipment or fencing a pool if it is required by law before the property can be sold.
Insuring the Property
The FSP should insure the property prior to taking possession.
The FSP should obtain at least 1 sworn valuation from an independent registered valuer.
According to the International Valuation Standards Council the definition of "market value" is -
"The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Marketing the Property
The FSP should obtain at least 1 marketing proposal from a reputable property agent. This proposal should include recommendations on the market value, the best way to sell the property (auction, private sale, tender), marketing and advertising strategy and any work needed to prepare the property for sale such as repairs and maintenance.
Advertising campaigns may include print media, online ads through reputable sites such as domain.com.au and realestate.com.au, billboards at the property, flyers or handbills, contact with potential purchasers through an agents internal marketing list, public inspections or inspections by appointment.
It is at the discretion of the FSP is they advertise the sale of the property as a mortgagee in possession. This may attract more purchasers with the onus on the auctioneer to ensure that the auction generates competition between bidders to achieve a sale at market value.
The Sale Method
In a vast majority of cases the property will be sold an auction with AFCA recommending a minimum 4 week advertising campaign with weekly inspections and inspections on the day of the auction.
If there is advice from a the FSPs experts recommending a private sale the FSP must take reasonable care with marketing and advertising. It must show that it bought the property to the attention of all potential purchasers thus creating competition and achieving market value.
Where the property is being sold at auction all available information should be considered such as valuations, marketing reports and previous offers.
Proceeds of the Sale
All proceeds following the sale must be accounted for and must be explained to the Borrower after the sale has been completed.
Funds from the sale may be used to reduce or payout the debt the Borrower owes to the FSP or other Creditor with a mortgage over the property, pay reasonable costs incurred in taking possession of, maintaining and selling the property.
Any surplus from the sale should be paid to the Borrower. Where the Borrower has loans from the FSP for more than one property any surplus may be used to reduce the balance of the other loan.
The FSP should only do what is necessary to obtain possession of the property. For example if the Borrower is prepared to offer up possession and agreeing to the sale it would be unnecessary for legal action.
Once in possession the FSP can reimburse itself for costs relating to the security, insurance and maintenance of the property as well as the relevant advertising and sale costs including agent commissions.
The FSP, under the Loan Contract or Mortgage, will also usually be allowed to recover reasonable and proper legal costs. The FSP, of course, must not recover more costs than was paid to it legal representative and must apply any discount or rebate to the Borrowers loan.
In the event of a complaint the FSP must provide invoices for all costs it has taken from the sale proceeds.
To learn more or to read this article in it's entirety visit AFCA Approaches - Mortgagee Sales