Banks' property buy-backs

AT a property auction held at my friendly neighbourhood sheriff's office last week, bank representatives were once again active buyers, purchasing most of the 12 properties on offer.

Prices were low, and in most cases members of the public were not prepared to offer more than 60% of the outstanding mortgage bond. The 60% level seems to be the price at which banks prefer to buy a property back themselves, rather than let it go to a buyer who could be picking up a bargain.

Why banks buy properties back themselves I don't know. It can't be for economic or accounting reasons. It's probably purely to protect the ego, and perhaps the career, of the manager who approved the bond in the first place.

Let's take a quick look at what happens at sheriff's auctions, and what follows after that.

If a borrower drops sufficiently far behind in repayments, the bank applies to the High Court for the property to be sold by the sheriff.

Most of the properties now being auctioned by sheriffs have case numbers like 07/xxx, which means the process started in 2007. Depending on the bank, the delay between the three to six months payments are in arrears and the time the property is finally sold could be anything from nine to 15 months.

When the sheriff sells a property - after having advertised it in very fine print - a bank representative, usually a senior clerk, is always in attendance. This representative is instructed to ensure that the property is not sold for less than a certain price.

This is a percentage of the outstanding mortgage, and at the moment it looks as if it is 60% of the balance owing. Remember, it could easily be as much as 20% more than the original mortgage, because interest and costs keep piling up during the 12 to 18 months from the borrower's last payment to the sheriff's auction.

'Properties in possession'

And it's at these auctions that Absa buys its houses back. So do Nedbank, FirstRand and Standard. They're called "properties in possession", the so-called Pips in the banks' statements.

Banks then offer the Pips to buyers, or they simply end up at ordinary liquidation auctions if the bank or other creditors decide they want the money they are owed by in-arrears bondholders.

We all understand that, but why does the bank buy the mortgaged property back, and how often does it benefit from this? In our complex with just over 300 houses in the R1m-R2m category, I recently counted 14 Pips.

They're all the same: empty and falling into disrepair. Their value is now definitely lower than the sheriff's prices scorned by the banks a few months ago.

The bank has to fork out for ordinary costs, like interest that must certainly be capitalised, rates, taxes and levies. These come in addition to a caretaker, usually an outsourced company, to look after the property as well as a garden service to provide at least a modicum of maintenance.

If the bank later goes the route of a liquidation auction, costs will rise to a further 10% higher than was paid at the sheriff's. This includes the liquidator and auctioneer's expenses.

And, for the benefit of those who have never been to liquidation auctions, they are even more poorly supported than sheriff's auctions. The few of us who are potential buyers usually know each another, and tend to allocate the property early on to the prospect who may need it the most or can put it to the best use.

Even if more there is more than one property on offer, buyers soon start working together. Sometimes you even get a little "gift" from a successful buyer if you don't push the price up unnecessarily.

- Fin24.com