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Mortgagee sale: Both sides.
Whether you are considering buying or facing the prospect of your property being sold, understanding how mortgagee sales work is essential.
What is a mortgagee sale?
When you take out a mortgage, you give the lender security over your property. If you default on your loan obligations, the lender has the legal right to sell the property to recover what you owe. This is called a mortgagee sale, or sometimes a "property in possession" or "PIP" sale.
For Buyers
Opportunities and significant risks. Know what you are getting into.
Why Mortgagee Sales Attract Buyers
- Properties may sell below market value
- Less competition from other buyers
- Faster settlement timelines possible
- Motivated vendor won't back out
The Significant Risks
- No vendor warranties
- No vendor disclosure
- Property condition unknown
- Non-negotiable terms
Sold "As Is, Where Is"
Mortgagee sale properties are sold with minimal warranties. The lender has never lived in the property and cannot tell you about defects, issues, or history. You are buying with far less protection than a normal sale.
Essential Due Diligence
Building Inspection
A thorough building report is essential. Make your offer conditional if you cannot inspect the interior beforehand.
LIM Report
Critical when you cannot rely on vendor disclosure. Reveals consents, notices, and compliance issues.
Title Search
Reveals encumbrances, easements, covenants, or other interests affecting the property.
Independent Valuation
Do not assume the price is a bargain. Understand true market value.
Legal Review
Mortgagee sale agreements often contain unusual terms. Have your lawyer review before signing.
For Those Facing Sale
If you are facing a mortgagee sale, understanding your rights and options is crucial.
Your Rights Before the Sale
Property Law Act Notice
The lender must give you written notice of their intention to exercise their power of sale, specifying the default.
Time to Remedy
You must be given reasonable time (usually at least 20 working days) to remedy the default.
Good Faith Sale
The lender must exercise their power of sale in good faith and take reasonable care to obtain a reasonable price.
Options to Explore
Negotiate with Your Lender
Banks generally prefer to avoid mortgagee sales. They may restructure your loan, extend your term, or accept interest-only payments temporarily.
Refinance
If your equity allows, another lender may refinance. This becomes harder once default notices have been issued.
Private Sale
Selling yourself usually achieves a better price. Ask your lender to hold off while you market privately.
Voluntary Surrender
In some cases, cooperating with the lender may result in a better outcome. Discuss with a lawyer first.
You May Still Owe Money
If the sale proceeds do not cover your debt plus the lender's costs of sale, you remain personally liable for the shortfall. This debt does not disappear with the property.
The mortgagee sale timeline.
Default Occurs
The borrower misses payments or breaches other mortgage terms.
PLA Notice Issued
The lender serves a Property Law Act notice requiring the default to be remedied within a specified time (at least 20 working days).
Notice Period Expires
If the default is not remedied, the lender can proceed with the sale.
Property Listed
The lender appoints an agent and lists the property for sale, clearly identified as a mortgagee sale.
Marketing & Sale
The property is marketed and sold, usually by auction, tender, or private treaty.
Settlement
Standard settlement occurs, though terms may be shorter than usual.
Distribution
Proceeds are distributed: first to sale costs, then mortgage debt, then other creditors, then any surplus to the former owner.
Key Takeaways
Mortgagee sales are sold "as is, where is" with minimal warranties - thorough due diligence is essential for buyers.
The lender's duty of care to obtain a reasonable price is owed to the borrower, not to buyers.
Building inspections, LIM reports, and legal review are critical before purchasing.
Those facing mortgagee sale have rights and options - contact your lender early and explore alternatives.
If the sale does not cover the debt, you remain personally liable for the shortfall.
Related Guide
Understand the full property purchase process, including special situations.
Read the First Home Buyer's GuideRelated Reading
Buying at auction in New Zealand
Property auctions are unconditional and binding. Understand how auctions work, what you must do before auction day, and the risks involved before you bid.
Vendor Warranties when selling property
When buying property, vendor warranties protect you from hidden issues. Understand what the seller promises about notices, building compliance, chattels, and third-party rights.