Foreclosure: the best way to get a cheap property?
Properties are at risk of foreclosure if owners cannot keep up with the payments. Important points you should know about auctioning a house.
18.11.2020
iStock/Michał Chodyra
Owning a property remains an impossible dream for many due to high purchase prices. A foreclosure auction can be a way to purchase a property cheaply. Here’s everything you need to know about property foreclosures:
1. Why do foreclosures occur?
If a property’s owner is no longer able to pay the mortgage, the property may be foreclosed. Foreclosures are usually quite rare, and banks try to find an alternative solution before it comes to this. Professional mortgage brokers can also help you find a cheaper mortgage. A property will only be foreclosed when all other possibilities have been tried and failed.
2. What happens during a foreclosure?
The value of the property is estimated. An official invitation to tender is then published in the local official gazette and on the website of the bankruptcy and debt collection offices. This will state the date the property is due to be foreclosed. Interested parties can participate in the foreclosure auction without registering. A physical presence is not mandatory: bids can be made through representatives and written offers are also possible. The bidding time when foreclosing a property in Switzerland is usually 30 minutes. The property goes to the highest bidder.
Good to know: there is often no minimum price for bankruptcy related foreclosures. The starting bid can therefore be as high or low as desired. Debt collection foreclosures are different. A starting bid is set in this case. Banks usually bid until their claims are fully covered.
3. What does foreclosure mean for the seller?
The owner can avoid losing their property by the auction date if they settle their debts in full. However, this only applies for auctions related to debt collection. In a bankruptcy related auction, the entire property of the debtor is auctioned. In this case, a foreclosure can only be avoided if the debtor pays all of their recorded debts, not just the debts on their property. The proceeds from the auction serve to repay the debts and cover any costs. Any remaining proceeds go to the debtor. If the proceeds from the foreclosure are not sufficient to pay off all debts, the debts will be settled according to their rank. Outstanding debts remain unless bankruptcy procedures have taken place. Professional estate agents can help sellers achieve a fair selling price.
4. What should bidders and buyers keep in mind?
Get information: request information about the property. Among other things, this includes auction conditions, a list of encumbrances, land register entry details and easements such as usufruct rights.
Viewing the property: there are no guarantees and no defect rights if a property is acquired through auction. If in doubt, take an expert with you who will point out weaknesses and construction defects. At the same time, they can estimate the property value.
Prepare your finances: make an appointment with the bank and have the lender confirm in writing how much finance they can offer.
Prepare your strategy: stay firm and stick to your strategy. When it comes to auctions, the spoken word is legally binding. It can get expensive if you win the auction but then withdraw. You may have to pay the bid bond, which can quickly reach several tens of thousands of francs. The responsible bankruptcy or debt collection office may also schedule a new date for the auction. You must cover the costs incurred. If the highest bid at the second auction is lower than your bid from the first auction, you must pay the difference.
Tip: visit an auction in advance. You can get a feel for foreclosures and familiarize yourself with the procedures.
5. What costs may be incurred by the buyer?
If you win the auction, you must pay a deposit immediately afterwards. This is usually around 10-20% of the estimated property value. After paying the deposit and signing the auction documents, you will receive the keys to your new property. As soon as you are entered in the land register, you are officially the new owner.
The buyer must also factor in the following costs:
Utilization costs
Costs of transferring ownership
Costs for necessary deletions of mortgages and easements as well as changes in the land register and in the lien titles, as well as ongoing public charges for water, electricity and waste collection
Other payments with a statutory lien that were not yet due at the time of the auction (such as property taxes)
The land registry fees on the auction purchase price
Property transfer tax (depending on cantonal regulations)
6. Is it worth taking part in a foreclosure?
Property is often sold below market value in foreclosures. However, bargains are by no means guaranteed. Demand is high in sought-after residential and metropolitan areas, and prospective buyers drive prices up quickly.
The chances of acquiring a property below market value are higher in bankruptcy auctions. As a rule, bankruptcy auctions do not have any minimum prices. However, foreclosures relating to debt collection stipulate a starting price for the auction.
7. What is the difference between foreclosures and bidding processes?
Bidding processes are auctions that have little in common with foreclosures. The seller advertises the property, often at a low price. Estate agents can provide advice to sellers. If you’re interested, make a no-obligation offer. The highest bidders will receive more information and are then asked to make a second, binding bid. The highest bidder wins the auction.
Sellers use bidding processes to maximize profits, especially for investment properties, for houses or apartments in areas with few properties or for unique/special properties.