Snapping up property at below the prevailing market price

When Titus Wekesa had a medical emergency two years ago at a time he was broke, he had no option but to borrow from a bank in Kitale, where he resides.

The bank agreed to lend him Sh400,000 as he used the title deed for his half-acre as collateral.

A year after the lapse of the period in which Mr Wekesa ought to have completed repaying the loan, the bank tired of trying to trace him, moved to sell the piece of land to recoup the amount it was owed plus interest.

Mr Wekesa, who surfaced later, had no option but to let the bank sell the property to offset the debt he owed them.

Two months down the line, Joseph Ominde from Kakamega bought Wekesa’s land from the bank at Sh350,000,  a lower price than even himself had anticipated. In his words, the land which hosted a disused stone house was sold at a throw away price.

Ominde is currently revamping the building on the land. He intends to turn it into a shop, which he will let for monthly rent.

As the real estate industry grows, some investors have found it better to explore into this realm, acquiring distressed property for their own use or for leasing purposes at cheaper prices.

However, for an investor who intends to save money on such properties’ acquisition; after bearing considerable expenses on renovations and maintenances, pre-foreclosed and foreclosed properties, which are sometimes called real estate owned (REO) property, are a more fitting investment. Mr Felix Onyango, the chief executive officer of Dominion Valuers Ltd, a Nairobi-based real estate consultancy firm, and also an advisor and property valuer, describes foreclosed properties as those that are put up for sale by a lender in a bid to recoup a loan on which the property was put as security by a borrower. 

Foreclosure is the entire legal process that permits a lender to take complete custody of and sell these properties due to defaulting and non-payment of the loan by the involved borrower.

This happens when the debtor stops making payments as per a pre-arranged agreement and still yet, does not offer any details or communication on why they are not keen on making the repayments of mortgages, taxes or credits upon which their property acted as indemnity.

'NORMAL'

Mr Onyango notes that it is normal for these properties to be dilapidated and distressed because they are left abandoned as their owners, due to lack of means and also the property’s imminent foreclosure and ultimate seizure by the lender, tend to disregard their maintenance.

“Sometimes, out of bitterness, the property owners deliberately neglect the property and hence leave it in a poor state,” says the real estate valuer.   

However, a smart investor can take advantage of these events, by purchasing the property, doing  minor refurbishments and turning it into a worthwhile investment with the end-product every so often being a worthy one.

“The most common ways of buying pre-foreclosed or foreclosed properties are through a real estate agent or at a public auction, and while these properties are often deemed inexpensive, with many often sold at below-open market rates, the buyer should keenly observe due diligence to ensure their investment does not yield financial losses,” advises Mr Onyango.

For starters, pre-foreclosure sale is also commonly called a short-sale, and the owner is required to leave the property after signing the short-sale agreement with the lender and its eventual sale.

During pre-foreclosure, the property owner, however, still has some control of the property. But because they have ceased being able to make timely payments, they may negotiate with the lender to facilitate sale of the property at usually not more than 75 per cent of its open market price to clear their debt. 

Factors such as job layoffs and terminations, and emerging demands for cash could cause one’s real-property to fall into pre-foreclosure and eventually foreclosure, according to real estate experts.

However, it is the defaulting, non-communication by the property owners and probably cutting of ties with the lender that hastens the foreclosure of their property, according to Robert Simiyu, another realtor and the head of Nairobi Best Homes,  a constituent subdivision of the Nairobi based real-estate consultancy firm, Villa Care Ltd. 

Mr Simiyu says while different lenders have their own grace periods for their debtors between the start of the borrower’s defaulting to the actual foreclosure period, many of these reprieve periods commonly range between four to six months.

It is soon after the lapse of this grace period that the prospective buyer can make a purchase bid for the property while still in its pre-foreclosure state.

PURCHASE BID

The owner has to agree with the lender to sell the property at a price closer to the balance of the loan as this helps to quickly sell it to avoid getting to foreclosure stage, where the owner loses control over it and the lender gets sole decision-making rights over the property. 

An advantage to the buyer is that purchase at this stage translates to a discount for the purchaser. By extension, it also helps the lender to avoid costs usually involved in the often more bureaucratic foreclosure process.

Despite currently not being a widely used approach in the country’s property sector, buying pre or foreclosed property comes with benefits just as well as it comes with its few downsides, according to Mr Simiyu.

He notes that it is as propitious as it is a chancy gamble and the buyer must always be diligent enough to ensure it ends up as a profitable bet. 

“It has benefits such as one may be able to purchase a property at a much lower price, especially if it is in pre-foreclosure stage where its owner could be rushing to sell it quickly before it goes into foreclosure, where the lender will take the property’s full control,” says Mr Simiyu.

He says the fact that the owner is hasty to sell the property puts the prospective buyers at an advantage as they get a considerable sway in pitching a bargaining price.

Banking institutions and loaners are also often willing to offer such properties at a discount as the longer they hold onto them, the more it costs in maintenance expenses and any other arising taxes.

Similarly, foreclosures can be found at all class levels with pricing points ranging from starters, for those who are new to the strategy and possess minimal finances, to luxury homes and properties for the affluent, who are well-versed in the approach.

Sometimes some of these properties just need minor repairs or improvements to be as good as new. And with these done, an investor can successfully turn a distressed foreclosure into an admirable property.

CHALLENGES

However, snags in this approach may handicap a prospective investor.  Due to the fact that foreclosures are often offered at considerable discounts, the buyers may find themselves contending with stiff competition and biddings from other interested purchasers, with the increased demand in turn inflating the property’s price.

Contrary to norm, some adamant pre-foreclosure owners may offer much lower discounts for their properties, with others also tending to offer exaggerated prices in the hope of earning more profit from the sale.

And since lenders wish to recoup at least what they are owed from the property, they sometimes may offer only a slim discount to ensure that what the property sells for fully recovers their loan and additional expenses they incurred in the foreclosure proceedings.

Foreclosed properties may be traded at an auction and an investor buying such property will be required to pay for it immediately. In this short time, one may not have fully inspected the property before making the purchase hence risks ending up with a substandard investment or probably one that he/she doesn’t like.

Some of these foreclosures could occasionally need expensive repairs as the previous owner might not have afforded their fixes. Further, vandalism and burgling on such seemingly uninhabited properties may have made them worse. Also, the longer a property remains in disuse demands more renovation and maintenance.

After purchase, sometimes the buyers find themselves having to evict the former owners, who may out of frustration damage the  then mete their frustration on the property by damaging some of its components.

“Depending on the community where the property is, especially the close-knit ones, neighbours will tend to be hostile towards the buyer, regarding him/her an intruder, who took advantage of the misfortune of one of their own and acquired their property. The buyer will find it hard to settle in the neighbourhood especially if he/she has to live there,” says Mr Onyango. 

The buyer is also sometimes required to help pay the additional fees that may arise in foreclosures’ legal proceedings, with the bureaucratic processes involved being sometimes lengthy and time consuming.

Some foreclosures tend to have liens attached to them, and after purchase, the buyers find themselves having to pay old arrears associated with the property especially with the lenders often not keen on footing the additional charges.

The best part, however, is that if the investor has the resolve to counter these snags, he/she will realise that foreclosures could be among the best properties one can acquire at economical costs.

There is good profit in foreclosed properties, but an ingenious investor should know what they are getting into beforehand and choose the real property cautiously, according to Mr Simiyu. 

“During the properties’ purchase, in many cases only one real estate agent is involved, who is usually from the property seller’s side. If the buyer doesn’t have ready cash, he/she requires a preapproval document from a lending institution to enable the transaction to proceed. There is also little, if any, room for bargaining and negotiations, and the property comes as it is, hence the buyer pays for the necessary repairs,” Mr Simiyu says.

It is thus safe to find a real estate agent who is knowledgeable in the intricacies of the foreclosure market, according to Mr Onyango. “As a buyer, whether you choose pre-foreclosure or foreclosures, always involve a professional. The support of experienced specialists such as real-estate agents and lawyers is vital,” says Mr Onyango.

PRIOR ASSESSMENT

The realtors also advise a buyer to not disregard a comprehensive inspection of the property beforehand because once a deal is done and payment made, there is no going back.

Disregarding prior inspection of the property often leaves the buyer discontented on later realising that the property measures lesser than his/her expectations and money’s value.

Mr Onyango says discounting the inspection could leave the buyer with a property whose refurbishment and maintenance is overwhelming after the foreclosure deal. “Whether very high or low, the cost of repairs naturally shifts to the buyer after the transaction is complete, which sums up why you should strive to protect yourself,” he adds.

Prior assessment of the property is encouraged as it also helps in determining its sale condition, its estimated cost of repairs hence a fair and reasonable price offer, and also the funding of the purchase.

The buyers should also demand title documents for the real estate to ensure they are up-to-date with all matters that pertain the property they eye.

Ensure you involve property registration authorities to especially verify that the property has no outstanding previous liens as well as confirm that the title deeds are accurate and updated.

“There may be liens on the property or its title documents, which may not be noticed until the foreclosing process begins. These could muddle the transaction. So, always make a contextual verification of the property’s details and sale,” says Mr Onyango adding that at this point, a real estate lawyer and a property expert who is proficient in foreclosure transactions are an invaluable resource.

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MAKE PRIOR ARRANGEMENTS FOR FUNDING

Ensure you have the required amount of money to meet the cost of purchasing the property as the competitive nature of these usually low-priced properties may attract many buyers and without the money ready, the property will most likely be bought by another buyer.

Experts recommend making sure prior arrangements for funding the purchase are in place even before embarking on hunting for the property.

“Make sure that you get an up-to-date pre-approval document from a financier, which details how much money you can borrow, based on their assessment of your past credit scores and income, if you feel you cannot exclusively fund the purchase” says Mr Simiyu.

For a home in which the buyer wants to stay in, check that it is in a safe neighbourhood where you will be comfortable living. Ensure there are basic amenities and also that  neighbours are people one can well relate with. An unsafe neighbourhood is unpleasant to live in and usually increases the risks of vandalism on the property particularly during the transaction processes. This increases the would-be-buyers’ repair and maintenance costs.

The property experts additionally advise that one shouldn’t disregard the fundamentals that make a property fitting just because its listed purchasing price is a bargain. They also put emphasis on involving an expert in the entirety of the processes involved, the significance of researching on the property, and following due diligence.

Ensure you involve property registration authorities to especially verify that the property has no outstanding previous liens as well as confirm that the title deeds are accurate and updated.