Important Things to Know Before Purchasing a Foreclosure Property

In recent years, many Hong Kong residents have chosen to purchase bank-owned foreclosure properties due to the ease of obtaining a mortgage loan. However, buyers need to be aware of certain factors when choosing a foreclosure property to avoid contractual pitfalls, allow enough time for due diligence, and ensure the property is legally sound. Here are the key points to keep in mind when buying a foreclosure property:

 

1.Pay attention to the terms of the sales contract
The sales contract is a legally binding document between the buyer and the seller, and foreclosure sales contracts often contain several clauses to protect the bank's interests. Before signing the contract, buyers must carefully review the contents, understand the details of each clause and the related legal responsibilities. Some key terms to look out for include:

 

• The bank does not assume responsibility for the property's debts, such as outstanding management fees, interest, and legal fees, which the buyer must pay.
• The bank does not guarantee the completeness of the property's ownership rights, nor is it responsible for any unauthorized alterations made to the unit.
• Buyers are responsible for the bank's legal fees.
• Other terms that limit the buyer's rights.

 

Finally, the buyer needs to bear the bank's legal fees. Therefore, before signing the contract, buyers should consult with a lawyer to ensure they fully understand the contract's contents. If there are any questions, buyers can ask their lawyers or consider other property options.

 

2.Foreclosure sales typically have a transaction period of 45 days
The transaction period for buying a foreclosure property is different from that of a second-hand property and is determined by the bank providing the mortgage loan. Generally, the transaction period is 45 days. Therefore, buyers should apply for a mortgage loan as early as possible and allow ample time for bank approval. If the buyer fails to complete the transaction within the stipulated period, the bank has the right to cancel the sales contract, and the buyer must pay a penalty.

 

3.Conduct due diligence before buying
Before buying a foreclosure property, buyers should conduct due diligence to ensure the property is legal. During due diligence, buyers can learn about any unauthorized alterations or illegal structures associated with the property's past or present. Buyers can also review the property's drawings to determine if there have been any unauthorized alterations made to the unit. In addition, due diligence can help buyers determine the following crucial information:

 

• The property's owner
• The purchase price from the previous owner
• The mortgage status of the building

 

This information can help buyers determine whether the property has negative equity, unresolved legal issues, or other government-imposed restrictions. Buyers must ensure the property's legality to avoid purchasing a problematic property.

 

4.Set a maximum bid
When participating in a foreclosure property auction, buyers should review market prices and set a maximum bid they are willing to accept. When setting the maximum bid, buyers should also consider the property's features and potential risks. For example, unresolved legal or renovation issues can affect the property's value. Additionally, since competition for bank-owned foreclosure properties is typically lower, buyers do not usually have to pay a high price, and setting a maximum bid can help buyers remain rational during the auction.

 

5.Consider "Sealed-bid Auction"
Aside from auctions, banks can also entrust real estate agents to sell properties, with the price generally referencing the market value. Buyers can submit a bid in writing via the agent, and this method is known as "Sealed-bid Auction" as the bank does not reveal other bids. This method is more private and reduces the burden of competing with other bidders.

 

6.The highest bidder may not always win
A "sealed-bid auction" is a common method for selling assets, where a bidding period is set, and the bank will sell to the highest bidder after the deadline. However, if all bids are below the bank's reserve price, the bank may reissue the invitation to bid, making it uncertain that the highest bidder will be successful. To increase their chances of success, buyers must pay attention to market conditions, devise a rational bidding plan, and maintain composure during the competition.

 

7.Paying a deposit
When submitting a bid, the agent will generally require buyers to pay a deposit of around 3-5% of the proposed bid to prevent buyers from withdrawing after winning the bid. If the buyer fails to secure the property, the deposit will be refunded. Therefore, buyers need to have enough funds to pay the deposit and avoid withdrawing from the bidding process.

 

8.Mortgage financing for properties with existing leases is relatively low
Sometimes, banks selling foreclosure properties may include an existing lease. In this case, the buyer's mortgage application will be considered as a non-self-occupied property application. If the buyer does not have an existing mortgage, the mortgage financing will only be 50%, and if the buyer has an existing mortgage, the financing will only be 40%. Buyers need to be aware of this and ensure they have enough funds to purchase the property.

 

9.Check if the property is considered inauspicious
There is no clear legal definition of an inauspicious property, so the registry search will not reveal whether the foreclosure property you are interested in is considered inauspicious. If the buyer is concerned about this issue, they can seek advice from real estate agents or lawyers to learn more.

 

10.Pay attention to renovation issues and allocate additional costs
Many bank-owned foreclosure properties have been vacant for some time, and the previous owner may not have restored the unit before moving out. Therefore, buyers need to be prepared for the possibility of additional renovation costs. Buyers need to allocate a certain amount of funds to cover renovation costs and other issues.

 

In summary, buying a foreclosure property requires careful consideration of several factors, and buyers should research market trends, understand the condition of the property, make a reasonable offer, and seek professional advice. By following these steps, buyers can purchase a bank-owned foreclosure property that meets their needs and achieve their financial goals.