Banks Cannot Auction Off Repossessed Properties Without Reserve Price
Until recently homes that had been repossessed could be sold without a reserve price, often to the detriment of homeowners. This is set to change.
Picture the scenario. You buy a home, you put down a deposit and make bond repayments for a couple of years. Things go along swimmingly until you lose your job and you can no longer afford the instalments. The property is eventually repossessed by the bank and although you’ve lost your home, you assume that at least the debt is off your back and you won’t have any more financial worries – at least on that front – anymore, right? Wrong. The bad news is that until very recently, banks could auction off a property for any sum and even worse, the original bond holder would still be responsible for any shortfall. In other words, the bank didn’t have to place a reserve on the property and it was sold to the highest bidder – regardless of the sum bid.
It was a situation that was always going to be open to abuse and many, many South Africans lost out horribly when their homes went under the hammer. It seems incredible, but there are numerous stories of homes being sold for pitiful amounts. In one instance a home was sold on auction for R100 and resold for R350 000. Another was sold for R10. Obviously these paltry sums aren’t going to make any impact on the outstanding bond and perhaps more importantly, aren’t going to make a dent in any legal fees incurred. To be frank, it was quite incredible that the situation was allowed to go on for so many years. According to one legal expert, advocate Douglas Shaw, homeowners have over the years lost an estimated R60-billion in foregone home equity as a result of the banks’ repossession practices.
The good news for struggling homeowners is that a new law due to come into effect in the near future will allow the courts to set a reserve price when the property is sold via sheriff’s auction.
According to a report in The Conversation, penned by Dr Reghard Brits, a senior lecturer in the department of mercantile law at the University of Pretoria: “This is an important development that brings South Africa in to line with international best practice. For example, German law already prescribes certain set minimums at which the property must be auctioned.
“Introducing similar rules in South Africa means that the country’s home owners, and in particular bond holders, will be better protected when faced with financial difficulties. It is estimated that South Africa has about 6.1-million formal homes, and about 30 percent of these are bonded. [Although] reliable figures are hard to come by, some estimates suggest that thousands of homes are repossessed and auctioned in South Africa each year.”
He adds that the new amendments include a number of things that relate to the auctioning of homes by creditors. These include allowing courts to set a minimum price at which the bidding must start, taking into consideration the market value of the property, the sum owed to the bank as well as the amount outstanding in rates and levies.
While it’s incredible that the loopholes which allowed repossessed property to be sold for a song remained in place for so long, the new law will hopefully provide protection for those who have fallen on hard times. Knowing that a home you owned had been sold for a pittance and that not only were you homeless, but were still liable for the outstanding debt must have been a bitter pill to swallow.
“The amendment of court rules in themselves should certainly close the gaps exploited by unscrupulous operators,” says Brits. “But there will be a need for complementary action to make the new rules even more efficient. The system should for example ensure that auctions are better advertised and better attended. It’s not clear how the wrongs of the past can be corrected, but at least the new rules are a big step in the right direction to ensure justice in the auction industry going forward.”