Risks and benefits of purchasing a mortgaged apartment

Recommendation points

• Factors determining the price of mortgaged apartments
• The relationship between the borrower and the bank
• Realtor skill
• Apartment characteristics
• Unbearable loan payments
• Simulated apartment sale
• Buying a “default” mortgage apartment from a bank
• Settlement schemes for mortgaged apartments
• Summary

First, let’s define the terminology – in this article, the purchase of a mortgage apartment means the acquisition of real estate from both quite “prosperous” owners of mortgage apartments, and from unlucky mortgage borrowers forced to sell housing under the pressure of life circumstances, or the acquisition of an already confiscated apartment from a bank.

Edvard Munch. Red Virginia Creeper. 1898-1900

There is a widespread opinion in society about the great benefit of such transactions for defaulted apartments – the possibility of saving almost twice the personal budget in comparison with market prices. As compensation for this hypothetical benefit, an equally stable opinion circulates about the great risks of such transactions associated with unfulfilled obligations of the previous owner, insufficient legal reliability, etc..

Real estate agencies and banks that provide mortgage loans do not keep any general statistics on the sale of mortgaged apartments. The volume of this sector in the real estate market can be estimated from the comments of several senior real estate specialists in Russia. If the head of the elite real estate department of A-Realty Group A. Ryumin calls the number of such transactions in his company no more than 3% of the total number, then the head of the mortgage service of RELIGHT-Real Estate I. Kazhikina voices the figure of 7% … According to the regional director of INKOM-Nedvizhimost Y. Lurie, the number of such transactions in his company last year amounted to 9% of the total, the head of the secondary housing department of BEST-Nedvizhimost E. Bulychev estimated the share of transactions with secured housing at 20 %. Y. Lurie states that “realtors are constantly selling real estate, which is in bank pledge,” that is, its market share can be considered significant. As E. Bulychev explains, most of such transactions “take place on the free will of the owners – for example, the sale of a one-room apartment for the purchase of a two-room apartment after the birth of a child, etc.”

Forced sale, according to the unanimous opinion of all experts, is the smallest segment in transactions for mortgaged apartments.

Most of the owners of mortgage real estate, unable to pay off their loan, turn to real estate firms even before the banks in court force them to sell. M. Markarova, the managing partner of MAYFAIR Properties, estimates the number of such “truly default” sales in her company at 20-25% of the total number of mortgaged apartments being sold. Sale under duress, according to the unanimous opinion of all experts, is the smallest segment in transactions for mortgaged apartments. The head of the department of mortgage loans of the company “NDV-Real Estate” A. Vladykin explains this by the fact that such cases occur only after a long delay in payments – at least 6 months. “Banks are trying to solve the problem” peacefully “, offering deferrals, reducing monthly payments, and they decide to sue only after the limit of their patience has been exhausted”.

Kugach Yuri Petrovich, From the recent past

A very important point on transactions with pledged “default” real estate is explained by I. Kazhikina (RELIGHT-Nedvizhimost): “Aggressive pressure on the owner of a mortgage apartment from creditors, collectors, realtors and other persons in order to force him to sell his property without a court decision fall under article 179 of the Civil Code of the Russian Federation ”. Let us explain to our readers that this article of the Civil Code deals with the illegality of a transaction made under the influence of threats and difficult circumstances on extremely unfavorable terms. Thus, according to I. Kazhikina, such transactions “have every chance of being invalidated in court in the future.” A. Saprykina, deputy head of Delta estate, adds that the purchase of a mortgage apartment through an auction (after a court decision) imposes on the buyer “the need to make sure that there is no appeal against the court decision by the former owner.” Otherwise, the subsequent long “litigation for the new owners can become very likely and the result will be difficult to calculate in advance”.

Factors determining the price of mortgaged apartments

The relationship between the borrower and the bank

The criticality of financial relationships in the borrower-bank pair. The closer the credit situation is to the textbook phrase “Y – y, how is everything running …”, the lower the price for “a default apartment.” A large total amount of debt, together with penalties and interest, coupled with a long period of ignoring payments on the part of the borrower, allows the bank to dictate the material terms of the transaction. T. Vorobyova, deputy head of the Moscow Real Estate Agency, speaks of a record in her practice “figure of 25% of the price difference between the mortgage apartment and the market price for it.” A. Vladykin (NDV-Nedvizhimost) considers the low price “the main factor determining the interest of potential buyers in the mortgage apartment”. However, A. Bannikov, head of the secondary real estate department at Azbuka Zhilya, recalls that the majority of sales of mortgaged apartments occur after an “amicable” agreement between the bank and the borrower, and “the satisfaction of both parties with this agreement does not allow counting on a significant reduction in the price of a mortgaged apartment relative to the average market price. indicator “.

Realtor skill

The skill of a realtor can significantly affect the price of a mortgage apartment. This factor is well illustrated by the example of two specific Moscow deals in the fall of 2010, cited by Yu. Lurie. In the first case, the purchase of a mortgage three-room apartment near the Polezhaevskaya metro station was carried out by a realtor at a price of 800,000 rubles less than the next cheapest similar offer on the market. Another episode is the sale by an experienced realtor of a two-room apartment in Domodedovo. Having reasonably interested his agent in the maximum price, the borrower received the market value of the apartment – that is, it was sold even more expensive than the average price!

Apartment characteristics

The consumer characteristics of the sold mortgage apartment can significantly increase its value. A. Ryumin (“A-Realty Group”) testifies to the great demand for well-located apartments with high-quality repairs: “for such objects, some fear of buyers about transactions involving the bank is more than compensated by their convenience and comfort”.

Vincent Van Gogh. Vincent van Gogh’s Room in Arles. 1888

“The high-quality consumer characteristics of the mortgage apartment allow the borrower to reasonably expect to sell at a price comparable to the market average,” adds E. Bulychev (BEST-Real Estate).

Unbearable loan payments

Unbearable monthly payments to the bank combined with the limited period of sale. A factor inherent to a greater extent in the elite segment of mortgage real estate. A concrete example is given by A. Ryumin on the sale of an elite Arbat penthouse in September 2010. “Despite the market value of $ 6.2 million, it was the need to pay the bank $ 100,000 on a monthly basis that was the main reason for the ‘markdown’ of the penthouse to $ 5.5 million.” You can consider this item as a special case of item 1, when the bank itself is interested in “driving” the situation with the mortgage apartment into a “debt deadlock” and independently redeem it at a discounted price.

Simulated apartment sale

Imitation of a sale by the borrower is a rather rare factor when the price of a mortgaged apartment is determined by the borrower with a deliberate excess of the price to minimize the likelihood of its sale. As the gene explains. Director of “IPOTEK.RU” D. Ovsyannikov, such cases are sometimes recorded as “a method of an unscrupulous borrower to avoid pressure from the bank when payments are delayed for a period of less than 6 months”. To avoid psychological banking “pressure” in the form of phone calls, mailing letters, etc. with demands to repay the debt, the holder of the mortgage loan provides the bank with evidence of his activity in the sale of the mortgage apartment, but the price set by him causes bewilderment among potential buyers at best. According to D. Ovsyannikov’s testimony, he is aware of a case where prices exceeded the market average by 35%. Further development of such a situation is possible either towards item 1, or the resumption of mortgage payments. According to S. Ivanova, deputy. Chairman of the Board of CB Agropromcredit: “Such actions will not only severely spoil the borrower’s credit history, but may also induce the bank to initiate legal proceedings with the maximum severity of possible claims against its client”

Buying a “default” mortgage apartment from a bank

Those real estate objects that are sold “forcibly”, after a court decision, are sold at auctions, and the cost is solely determined by the bank. And it is precisely for such transactions that the price can really be significantly lower than the market price – but only it can, which does not always happen in practice. If the gene. director of the company “Finnesco” N. Mozgalevskaya estimates the price of such apartments at least 10% lower than the average market level, while the head of “Rusipoteka” A. Ippolitov calls a much more modest figure of 5 – 6%. According to the director of IPOTEK.RU D. Ovsyannikov, deals on mortgaged apartments with a selling price “below 25% of the market price are extremely rare”. Banks that have received the right to dispose of the default apartment do not have the right to sell such real estate objects on their own, and attract a real estate company for this, which increases costs and, as a result, the final price of the mortgage apartment.

The law establishes that first of all the funds from the sale of auction apartments go to the bank, the borrower can only count on their balance. Moreover, as Andrei Bannikov (Azbuka Zhilya) says: “If the received auction funds are insufficient to cover banking expenses, the remaining part is recovered from the former owner of the apartment, and a new legal claim can be filed by the banking institution almost immediately after the auction.”.

During a period of declining real estate prices (seasonal or crisis), the borrower may find himself in a situation where the real sales value of the mortgage apartment will not cover the loan. As T. Vorobyova (“Moscow Agency of Real Estate”) explains, such situations are usually regulated by a loan agreement when it is signed, and banks include in the standard text a clause on the financial liability of the borrower with all the property he has. “This clause of the loan agreement becomes a very unpleasant surprise for the owners of mortgaged apartments – after all, most of them believe that if they cannot repay the loan, they risk only the mortgaged real estate.”.

Settlement schemes for mortgaged apartments

The Federal Law of the Russian Federation “On Mortgages” regulates transactions with mortgage housing in sufficient detail. Almost all experts consolidatedly state that the main difficulty of this type of real estate transactions is not associated with the dubious “legal purity” of the transaction, but with the difficulty of synchronizing the actions of all interested parties – the buyer, seller, bank, notary, registration chamber, etc..

B.M. Kustodiev. Merchant. Old man with money. 1918

The most common settlement schemes for mortgaged apartments include:

1. The seller receives from the buyer an advance payment equal to the amount of his debt to the bank – the mortgagee (or more), and with the obligatory execution of a preliminary agreement (the amounts are rather big!). As M. Markarova (“MAYFAIR Properties”) says, having received the amount of the debt in full, the bank issues the borrower a notice of its consent to alienate the mortgaged apartment. Having this document in their hands, the seller and the buyer sign a regular sale and purchase agreement, which must be registered (and the sooner, the better) register with the Rossreestr and receive an extract from the Unified State Register of Real Estate Rights (USRR) on the removal of the debt burden from the apartment.
2. Use of bank cells – on the day of the transaction, the amount that the debtor has already paid to the bank is pledged into one cell, and the seller will get access to it upon presentation of a notarized sale and purchase agreement and an extract from the USRR on the removal of encumbrance from his former apartment. As E. Bulychev (BEST-Nedvizhimost) explains, “the average term for the removal of encumbrances in the registration chamber is three working days, so the buyer does not risk anything”. The amount of the loan balance is placed in another cell, and the seller transfers it to the bank – the mortgagee on the day of registration of the transaction. The amount of money in excess of the credit debts of the mortgage apartment is transferred by the seller to the buyer directly, without banking services, after the completion of the “operation with cells”.
3. The buyer of the mortgage apartment can sign an addendum to the loan agreement, according to which he becomes the seller’s guarantor. This status gives the buyer of the mortgaged apartment a legally legal opportunity to pay off the borrower’s debt, after which the bank issues a notification of its consent to the planned alienation of the apartment. Further, in the Rossreestr, registration of the transfer of ownership, registration of the purchase and sale agreement and the removal of encumbrances take place simultaneously. Experts advise to describe such a scheme as clearly and in detail as possible in the preliminary contract..

The legal costs of transactions with mortgaged apartments are higher than those with conventional real estate and can vary greatly depending on the fees of authorized notaries. Almost all existing mortgage agreements contain a clause on penalties for early termination of a loan – these penalties will have to be paid. On average, for the company “BEST-Real Estate” E. Bulychev gives a figure for the cost of withdrawal from bail of $ 200 – it includes registration and state duty.

Experts in the real estate market are inclined to consider the risks of acquiring mortgaged apartments as highly exaggerated. T. Vorobyova (“Moscow Real Estate Agency”) speaks about the special thoroughness of checks of such transactions by all kinds of regulatory authorities (up to the prosecutor’s office and the Accounts Chamber): probable and repeated checks of these transactions in the real estate market in the future. ” M. Markarova (“MAYFAIR Properties”) adds that competent legal observance of the Federal Law “On Mortgage” and the corresponding articles of the Civil Code of the Russian Federation “reduces the risk of invalidating transactions in pledged apartments to almost zero.”.

Summary

The sale of mortgage-backed apartments is a noticeable segment in the housing market, and due to clear signs of the revival of mortgage lending, it has prospects for growth. The problems with this type of transaction are more likely to be associated with high bureaucratic complexity than with potentially high legal risks. The overwhelming majority of mortgaged apartments are sold at quite market prices. The probability of buying a cheaply defaulted real estate object is quite comparable to the probability of purchasing an “ordinary” apartment with the same discount, in no way involved in the mortgage. Real estate experts note that the decision to buy a particular mortgage apartment is usually made taking into account the entire set of parameters – that is, the price, location, quality of repair, and the availability of infrastructure matter. This approach further brings the “mortgage” sector of real estate to the general proposals for the sale of apartments..