Every once in a while, at a Property Networking event, someone comes up to me and says they’re “interested in foreclosures.”
This usually tells me one thing: that they have been reading American books on real estate investing.
There’s nothing wrong with that, but in the UK, the law is quite different, and notably more on the “look out for the average person who falls behind on their mortgage” side and less on the “whatever the contract says “.
The first thing to keep in mind is that repossessions and foreclosures are different things.
- In a UK repossession, the mortgage company “repossesses” the home, sells it, uses the proceeds to pay the amounts owed, and then sends the balance to the borrower. The former duty to take “reasonable care to ensure…the best price that can reasonably be obtained” has been slightly modified in the Building Societies Act 1997 to “take reasonable care to obtain the true market value of the property mortgaged”. It is normal, but NOT required, for the mortgage company to obtain a court order to obtain a repossession to obtain true market value.
- In a foreclosure, by comparison, the mortgage company “repossesses” the home, sells it, and keeps all of the proceeds. This is only possible as a result of a court order, and it is almost unheard of for courts to grant it these days; they normally only grant recovery orders.
The second is that the big “key return myth” is just a myth.
- If you’re behind on your mortgage payments, you can’t just “turn the keys in” and have the clock stop on interest payments.
- A colleague of mine was once a branch manager at a building society: the day he took over the branch, he was shown a drawer containing about half a dozen sets of keys from people who had just brought them in, thinking this would leave to increase interest. I have no idea why this myth still abounds!
For the investor, the first two mean that, unlike in the US, it is highly unusual for an investor to get a good deal simply by finding out what properties have been foreclosed on and then buying them cheap from the mortgage company for cash. hand.
The big market opportunities out there are finding people who COULD be foreclosed on and negotiating deals with them that leave them better off than they could be if the repossession were to take place.