The term “foreclosure” can invoke fear and anxiety in many circumstances, but when uttered in the presence of the right real estate speculator it can result in quite the opposite effect. Evidently, your reaction to this concept of foreclosure will be determined by whether you find yourself on the right side of the fence or not.

Foreclosure is the legal process that a financial institution, in most cases banks, follow to take possession of a property in cases where persons are unable to make payments on their home loan. This can occur for a variety of reasons, including job loss, illness, or most recently, the effects of the Covid-19 pandemic.

The mortgage bond is a contractual instrument utilized mainly by financial institutions whereby the immovable property in question serves as security for the loan amount, until such a time as the loan amount together with the interest has been settled in full. In the event that a person defaults in their obligation to make such repayment in the form of monthly installments, the loan amount which is secured by the mortgage bond over the property may be sold subsequent to due legal process, to recover the amount owed to the bank.

When a default in payment occurs, the bank will typically send a notice in terms of Section 129 of the National Credit Act, which is in essence a letter of demand, giving the borrower due notice of their breach and providing a period of time to rectify such breach by settling the arrears. If the breach is not rectified by expiration of such notice period the bank may then initiate foreclosure proceedings.

The bank will then proceed to allocate the matter to one of the attorney’s firms on their panel to assist them with the foreclosure process. The process will proceed to issuing of a summons against the debtor to ultimately obtain a court order, also referred to as a judgment, against the debtor. This judgment will set out the amount owing on the loan, including any arrears and interest, as well as the costs associated with the legal action. Banks make use of agreements that have evolved over many years with the input of internal and external legal assistance to ensure that their compliance and contractual bindingness is on point. Debtors are very seldom in a position to raise a valid contractual defense and ultimately have mainly two options: pay up the arrears or see your property sold in execution.

Once the judgment has been obtained, the bank may then proceed with a sale in execution. This is a public auction of the property, which is conducted by a sheriff of the court. The auction is advertised in advance, and anyone can attend and bid on the property. Interested persons can obtain lists of public auctions to be held from any Sheriff’s office, normally by enquiring via email and requesting that such lists be sent on a monthly basis.

It is important to note that properties sold on a sale in execution are sold “voetstoots,” which means that the property is sold as is, and the buyer takes on any existing defects or issues with the property.

If the property is sold at auction, the proceeds of the sale will be used to pay off the outstanding debt owed to the bank, as well as any costs associated with the sale. These costs will also include sheriff’s costs, levies and outstanding rates and taxes. If the proceeds of the sale exceed the amount owing, the surplus will be paid back to the debtor. If the proceeds are insufficient to cover the outstanding debt, the debtor may still be liable for the shortfall and a new legal process will be instituted for the short fall amount.

The foreclosure process can take several months, or even years, to complete. During this time, the borrower may have the opportunity to come to an agreement with the lender and avoid losing their home. As a rule of thumb, it is determined that such a debtor will have until “the fall of the hammer”, referring to the closing of a sale at a public sheriff’s auction, to settle the debt.

In contrast to being the debtor in the foreclosure process, attending a sale in execution as a potential buyer can provide an opportunity to purchase the property at a fair value. Recently, sale prices have been more stringently regulated by the Court’s, having due regard for Municipal value and Market value. Municipal value in most cases is set to be lower than Market value. The judgment against the debtor will specify the Court’s reserve price, which is usually determined by a “give or take” median value between municipal- and market value.

The Sheriff at a public auction will in most cases seek to start off bidding at the Court’s reserve price. If a bid is entered the auction will proceed as per normal. If no opening bid is received for the Court’s reserve price, the Sheriff may elect to lift the Court reserve and offer the property at no reserve. If the highest bid does not reach the Court’s reserve price the Sheriff may write a report to the Court, indicating the highest bid received, which sale may then be ratified by Court, or not. If the highest bid is ratified by the Court, the transaction may proceed, alternatively the Court may grant relief to offer the property for a lower reserve and a new public auction will be arranged.

Taking the above process into consideration it is evident that in certain instances there may still be flesh on the bone for a skilled real estate speculator who knowns his way around the landscape. It can almost go without saying that an interested buyer must do his homework about his interested properties and find out as much as possible about the properties and the surrounding area.

In conclusion, the foreclosure procedure and sale in execution process can be complex and daunting for potential buyers. However, with the right guidance and information, attending a sale in execution can provide an opportunity to purchase a property at a fair and sometimes relatively discounted price. As with any property purchase, it is crucial to do your due diligence and obtain as much information as possible about the property before bidding at auction. Our qualified attorneys and conveyancers can provide guidance and advice to help you navigate the foreclosure process and make an informed decision as a potential buyer as well as aiding any client who has defaulted on their home loan.

Foreclosure