Buyer, beware when buying property from a receiver

Buying a property for the first time can be stressful, but buying a property from a receiver can be even more stressful.

In this instance, the warning “caveat emptor” or “buyer beware” has never had more significance.

The commercial reality is that the purchaser is typically buying a distressed asset which is often being sold at a competitive price, and may represent a “bargain”.

In acquiring a “bargain”, the purchaser is expected to assume certain risks and take on some of the due diligence that might otherwise stay with the receiver of the property.

It is important to remember that you are not buying from a proud owner who wants to present their property in the best possible light to obtain the best possible price.

The proud owner has failed to make mortgage payments.

The bank has obtained possession of the property by taking the necessary legal steps, or the owner has voluntarily given up possession of the property and handed back the keys to the bank.

A receiver then takes over.

So, what exactly is a receiver and why should one be so careful before making a purchase in this manner?

Receivers are typically appointed by a bank, pursuant to a bank’s mortgage.

Once appointed, the receiver takes possession of the property and the property is disposed of by way of sale.

Although appointed by the bank, the receiver acts as agent of the borrower.

The bank will have suffered a loss on the property and will want to dispose of it as soon as possible to minimise that loss.

The bank will want to sell the property as it stands, and will not want to incur any expense if it can be avoided.

The receiver has a duty to obtain the best price possible.

Once the sale is agreed, the bank’s solicitor prepares and issues the contract for sale with title documentation to your solicitor.

The contract will limit your rights to make standard enquiries, and will not provide replies to such enquires, which vendors must provide ordinarily.

Receiver contracts contain pages of special conditions which are not found in a standard contract.

The purpose of these special conditions is to exclude many of the warranties and representations that a purchaser would generally expect when buying a property from a private vendor.

Your solicitor will try to resist this and protect your position as much as possible.

There is likely to have been little co-operation or contact with the registered owner who would have direct knowledge of the property.

When receivers are selling distressed assets, they cannot give all of the normal warranties and assurances which a private seller would be expected to give.

The bank or receiver may have very little personal knowledge of the history of the property, disputes with neighbours over boundaries, notices that may have been received etc.

Normally, it is necessary for a vendor to satisfy a purchaser that the property substantially complies with the planning acts and building regulations.

Condition 36 of the Law Society Standard Contract of Sale contains a warranty whereby the seller agrees to prove that the property fully complies with all planning permissions and building regulations, and they will prove this by furnishing a certificate of compliance with these rules signed by an appropriately qualified architect or engineer.

Even where there are no planning problems, this condition can frequently be excluded from the sales contract.

The result is that the onus to have these matters investigated passes from the seller to the buyer.

The buyer, assuming that a mortgage is required to buy the house, will still have to convince their own lending institution that all planning matters are in order.

This usually means that the buyer will have to engage and pay an architect or engineer to make these investigations and issue the appropriate certification to enable the buyer to satisfy their lending institution in advance of the loan cheque issuing.

In receivership sales, the receiver contracts that he (or she) gives no warranty as to boundaries.

This is because he (she) has no personal knowledge of the property, and is only acting as agent of the borrower.

Accordingly, it is imperative that a purchaser carries out a full survey of the property to take account of such matters, and instruct a competent engineer or architect to ensure that the map attached to the contract for sale comprises the property entirely on the ground and forms part of the vendor’s title to the property.

Once the nature and extent of the risk being assumed by the purchaser is understood, the purchaser and his/her advisors can through careful due diligence assess the risks.

Ultimately, a decision will have to be reached as to what risks can be accepted on the basis of an informed decision.

TIPS:

1. Instruct a solicitor who is experienced in conveyancing and has a good reputation. Do not make rash decisions based on the lowest price.

2. Arm yourself with as much local knowledge as possible. Talk to the neighbours.

3. Make enquiries with the management company. The major difficulty for buyers of repossessed houses or apartments in managed estates is that the receiver’s solicitor will usually not have up-to-date information from the management company.

If you require a mortgage to complete the purchase of an apartment, no bank will lend unless the position of the management company and block insurance policy is in order.

4. All qualifications and limitations listed in the contract must be brought to your lender’s attention and their agreement sought and obtained in writing prior to the signing the contract.

5. Instruct a competent engineer or architect to visit the relevant planning department to ensure that there are no outstanding access, planning or building issues. Remember, the day you buy is the day you sell!

• Karen Walsh is a solicitor practicing in Walsh & Partners, Cork. Intending buyers should seek their own legal advice in relation to any purchases.