Owning a house especially in the urban areas is every resident’s grand dream. However, some have plunged into the deep end while overlooking the property market fundamentals. As ALLAN OLINGO found out, auctions from foreclosures are the latest trend hitting distressed home owners.

The real estate market was abuzz, fuelled by attractive loans and mortgage products. Then no one ever thought about the illiquid nature of real estate properties and the high financial risks. Suddenly, without warning, the situation reversed and homeowners have found themselves with unserviceable mortgages and loans leaving the lenders with no alternatives but the last resort —foreclosures.

The winners have been auctioneers, who have had a field day executing foreclosure orders from their clients. Hardly does a day pass without tens of auction advertisements in the dailies over properties, an indication that the real estate market has been hit hard.

A 2010 report by the Central Bank of Kenya showed that the number of outstanding mortgage accounts had double since 2006 from 7,275 to 15, 095 in 2010. The current default rate on mortgages hangs at around six per cent and with the current economic trend; this is bound to worsen even further as mortgage holders struggle to service them.

According to Charles Mwangi of Ruby Land, a valuation company, most homeowners are now defaulting on their development loans and this is what the banks are now foreclosing on.

“The reason most homeowners are in this state is because interest rates are quite high yet their income has not really improved. They are strained and hence default. The home owners who went the mortgage way are the ones hardest with high interest rates that made the monthly repayments impossible,” says Mwangi.

Auctions sanctioned

When such homeowners default, their lenders decide to foreclosure on their property explaining the reasons on the rise of auctioned properties.

Foreclosure is the legal process by which a registered owner’s right to property is terminated due to default. In most cases, it involves the forced sale of the said property with the proceeds therein being applied to the loan.

Conveyance lawyer Muthoni Wagenga says that when a bank forecloses on a property, it principally means that the developer’s rights on that property cease to exist, an occurrence homeowner’s dread.

“Where there is default on the borrowers end on repayment, a bank will ordinarily pursue such a borrower and issue reminders, demands and notices to the non payment default,” says Muthoni.

Muthoni says that it’s important that a homeowner servicing a mortgage always places repayment of the loan as their?first priority because the interest on the loan keeps computing running and when you fail, foreclosure beckons.

Last resort

 “Foreclosure is usually done as a last resort, where the borrower has continuously?failed to service his loan (due to default) and the lender, after a thorough evaluation believes that he is not in a position to do so,” says Muthoni.

Where there is default on the borrowers end on repayment, a bank will ordinarily pursue such a homeowner and issue reminders, demands and notices to rectify the breach in payment.

According to Muthoni, the bank will then issue a 90-day calendar notice (final notice) to the home owner, at the expiry of which it will seize the property and dispose it either through open market tenders mostly by way of public auction, or through private treaties.

This is the reason why you really cannot miss to see either people’s homes, property or land under auction because the bank only wants to recover their sums.

Valuation required

Before the property get to the auction level, a valuation of the property will have been undertaken to establish the market value which then becomes the reserve price, and such sale is conducted within the valuation period of six months, failure to which re-valuation and re-advertisement is conducted.

“This is because the lender is under an obligation to sell the property at near its fair market value. The bank’s intention at this juncture is not to make profit from the sale but rather to recover its money,” she says.

An auctioneer Michael Were says that the proceeds from such a sale are utilised normally to pay off the entire loan amount, accrued interest and all foreclosure expenses incurred therein.

“At the auction, we always target a reserve price that will recover the amount owed to our clients, which in most cases is the banks and also the fees for the professional or technical team engaged by the client,” says Were.

However, there has been instances, however, where the lender is unable to achieve the reserve price even after conducting more than one or two auctions and hence is unable to fully redeem the entire loan.

Says Were: “In such instances the lender will go after the homeowners other accounts, property and or assets to recover the remaining bit of the unpaid loan. Civil suits against the borrower have also been instituted in such instances, for the recovery of the unpaid balance.”

Were says that home owners who mostly default in settling their mortgage or loan repayments should never let the foreclosure clause be used on them but instead pursue other options.

Negotiated settlement

“It’s always very unfortunate when you see a prime property being disposed off cheaply because of a loan default, yet these homeowners can resort to negotiating a sale with the lender in a way which both parties benefit,” says Were.

By negotiating a sale, the homeowner can scout for a buyer of the property and then bring in the lender, draft an agreement and depending on the agreement the three of them have, he can even walk away with some money.

Interestingly, there are those people who have specialised in buying homes under auction especially because of their attractive low prices. This can be done from the seller in foreclosure, negotiating a sale or buying from the lender after a public auction.

Were says that the best way to buying foreclosures is before the home goes to a public auction and this involves negotiating directly with the seller, who can be the home owner or the bank.

“If this avenue fails, then the prospective buyers also have the option of bidding on a foreclosure at the public auction,” he says.