Selling or buying real estate with collateral

Last update: 06/09/2021

Question:

I want to buy a mortgaged apartment that is pledged to the bank. Is it possible to buy an apartment with a mortgage? How to do this correctly? What are the risks for the Buyer?

Answer:

It is possible to buy such an apartment, and such transactions occur regularly in the real estate market. The Buyer's risks here are small (more about them below) if he understands the features and technology of such a transaction. Let's explain in more detail.

A mortgage is an encumbrance on property rights. At the same time, the ownership right of the apartment owner does not disappear anywhere. There are simply some restrictions on the disposal of your property. In particular, if the apartment is mortgaged by a bank , then it can be bought (sold) only with the consent of the mortgagee (that is, the bank). This is directly stated by the Civil Code (clause 2, article 346, Civil Code of the Russian Federation) and the Law on Mortgage (clause 1, article 37).

But you don’t have to wait for this consent. How so?

The fact is that buying an apartment with a mortgage encumbrance can, in practice, happen in different ways. This depends both on the agreement between the Seller and the Buyer, and on the position of the mortgage bank.

Who can have the right to use the apartment? Surprises for the Buyer.

Apartment in collateral: what does this mean?

The guarantee of repayment of the mortgage loan to the bank is the property pledged as collateral. This could be an apartment, a house, a car, i.e. any liquid movable or immovable property. If the borrower does not fulfill his obligations to the lender, the latter has the right to foreclose on the pledged property: sell and compensate for losses from the loan issued.

A real estate pledge is an encumbrance of property rights that comes into force after registration with Rosreestr. From this moment, the owner of the property loses the ability to dispose of the property in terms of alienation. But he can freely use it for its intended purpose: living with his family in an apartment or cottage, registering at his place of residence, renovating his home.

Who sells mortgaged apartments?

If the client has not repaid the debt, and the housing is under a mortgage, the owner of the property is the bank itself, as the lending party. All information about this is contained in the Unified State Register of Real Estate. However, the legislation of the Russian Federation does not allow you to simply buy housing with loan arrears.

First, the potential new owner will have to pay off the debt. Then Rosreestr will receive information about the absence of debt and the entry will be deleted. It is sometimes more profitable to remove the encumbrance from a mortgaged apartment than to buy it from a developer. The difference in price can exceed 25 - 30% of the market value of the living space.

Buying an apartment with collateral: what to look for

Is it worth buying an apartment with collateral? This is a question often asked by potential buyers. Realtors note that almost a quarter of secondary market housing is burdened with bank debts. And, since the seller needs money quickly to repay the debt to the creditor, such objects can be sold at a significant discount, i.e. discount.

Registration of the sale of an apartment pledged to the bank is carried out on behalf of the borrower, but differs from a traditional sale and purchase transaction, since the written consent of the banking institution for the alienation of the pledged property is required;

Let us note that property with bank collateral can be sold voluntarily, on behalf of the borrower, when both the creditor bank and the debtor have come to a common decision to alienate the property and close the debt.

A common way to purchase real estate with collateral is by putting down a debt on behalf of the seller. Often this situation can be observed if the parties to a future transaction “found” each other on their own. At some stage it turns out that the apartment is pledged to the bank. But the buyer is so interested in the property that he is ready to pay the balance of the loan and then re-register the property as his own. This is a win-win purchase of collateral real estate, the safety of which is guaranteed by the bank.

The lawyer explained how the only housing can be pledged to the bank

As RG has already written, the courts have begun to apply in practice the fresh legal positions of the Constitutional Court of Russia regarding the debtor’s only home. In a specific case in the Vologda region, the court decided that executive immunity does not apply to the only residence if it is pledged. And now, in the same case, the court lifted the interim measures that prohibited the sale of the house while the proceedings were ongoing. So in the near future the mansion may be put up for auction.

The head of the De Jure Law Firm, Nikita Filippov, in a conversation with RG, said that in the law, in his opinion, it is necessary to establish a clear procedure for replacing expensive housing with less comfortable housing. At the same time, the procedure for eviction of the debtor and members of his family from the residential premises they occupy must be spelled out in detail while preserving for them constitutional guarantees for a decent standard of living. In other words: so that people don’t end up on the street.

— What did the Constitutional Court decide, how will practice change after this?

Nikita Filippov: In its ruling in the case of Ivan Revkov, the Constitutional Court officially allowed the courts of the Russian Federation to sell expensive real estate of debtors in exchange for providing less comfortable housing, taking into account the guarantee of the debtor’s rights to decent living.

It seems that the court’s clarifications will be reflected in practice in bankruptcy cases of the debtor, and will also be applied in the course of enforcement proceedings against the debtor by the bailiff.

— Do debtors often take advantage of the fact that it is difficult to take away their only home, and therefore live in luxurious houses and do not pay their debts?

Nikita Filippov: In the absence of clear criteria and legislative mechanisms for the sale of expensive single housing, not encumbered by a mortgage, debtors with financial difficulties took advantage of provisions on executive immunity. In practice, there have often been cases where debtors with multimillion-dollar debts deliberately purchased luxury housing for themselves in order to avoid paying off the debt. Since elite housing was the only one for the debtor, then, with the literal application of the rules on executive immunity, the court had no right to foreclose on other real estate.

— How can your only home be pledged to a bank? Isn't it prohibited for the bank to take the only home as collateral?

Nikita Filippov: Russian legislation does not establish prohibitions on concluding civil contracts with credit organizations, secured by the pledge of a single residence or rights of claim in relation to such residential premises, depending on the purpose of issuing funds. The risks of providing a single home as collateral, regardless of the purpose of the loan, rest with the borrower himself (Article 421 of the Civil Code of the Russian Federation).

In judicial practice until 2012, courts recognized the nullity of a pledge agreement for a single home, concluded to secure the fulfillment of obligations under a non-targeted loan. However, the explanations of the higher courts, having established a violation of the interests of creditors in this case, prevented such a vicious practice (for example, Resolution of the Supreme Court of the Russian Federation dated May 29, 2012 No. 80-B12-2, Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated November 26, 2013 in case No. A65- 15362/2009-SG4-39).

— How did the practice with the arrest of the only home previously develop, were there any precedents?

Nikita Filippov: Current practice allows for seizure in order to ensure the safety of the debtor’s only home. According to the Supreme Court of the Russian Federation, despite the fact that the law prohibits foreclosure on the debtor’s only home under writs of execution, it is possible to seize such housing, because seizure is not a foreclosure (Definition dated January 11, 2016 No. 78-KG15-42).

The significance of the arrest is that the debtor will not be able to sell, donate or mortgage the only housing under the contract, and third parties will not be able to claim it. That is, we are talking about preventing abuse of rights on the part of the debtor or third parties.

— Is there a danger that now all debtors will be thrown out into the street?

Nikita Filippov: The legislation of the Russian Federation establishes executive immunity in relation to the claims of creditors to the debtor’s only residential premises or a share in the right of common or joint ownership in a residential premises. By virtue of the letter of the law, foreclosure on the only housing owned by a citizen by right of ownership is possible only if it is pledged under a mortgage agreement or a mortgage by force of law, and the legislation on mortgage allows foreclosure on it.

Foreclosing on the only home of a debtor not encumbered by a mortgage was previously not allowed in judicial practice, since it was fully covered by executive immunity.

In the ruling in the case of Ivan Revkov, the Constitutional Court of the Russian Federation recognized the possibility for creditors to foreclose on the debtor’s expensive only home, unencumbered by a mortgage, as part of the debtor’s bankruptcy case.

As the Constitutional Court of the Russian Federation noted, the purpose of executive immunity is not to preserve the debtors’ right of ownership of the only housing, but to prevent violation of the constitutional human right to housing, guarantees of providing the debtor and his family members with housing sufficient for a decent his residence.

In this decision, the Court concluded that the refusal to apply executive immunity does not mean that the debtor will be deprived of the right of ownership of the residential premises. Instead of expensive housing, the debtor and members of his family may be provided with premises of a smaller area within the same settlement where these persons live. This condition can be ensured, in particular, if replacement housing is provided by the creditor in the manner established by the court in the bankruptcy proceedings of the debtor or in the course of enforcement proceedings.

— What changes in legislation do you think are needed to regulate this area?

Nikita Filippov: The first thing that needs to be done is to bring the provisions of the Code of Civil Procedure of the Russian Federation, the bankruptcy law, and the legislation on enforcement proceedings into compliance with the requirements established in the resolution of the Constitutional Court of the Russian Federation in the case of Ivan Revkov. It is necessary to establish at the legislative level clear limits of the effect of executive immunity in relation to the only housing of debtors, as well as criteria under which the court can foreclose on such real estate.

As a second innovation, we consider it necessary to propose to the legislator to establish a clear procedure for replacing expensive housing with less comfortable housing, including the procedure for eviction of the debtor and members of his family from the residential premises they occupy while preserving their constitutional guarantees for a decent standard of living. The key issues that determine the procedure for providing another residential premises, in our opinion, are: change of place of residence by the debtor within one locality, the presence of minor children preventing their eviction from the occupied residential premises; the presence of social institutions and the distance to work of the debtor and his family members; footage, layout, current repairs of the premises provided, etc.

— How often do foreclosed apartments (which are not the only home) be sold? Where can I buy them? Will the seized apartment have a price lower than on the market?

Nikita Filippov: Buying seized property of debtors can be a profitable activity for a potential buyer, since such property can be sold at auction at a discount of up to 80% of its market value. In accordance with the legislation on enforcement proceedings, the sale of seized real estate takes place at public auctions in electronic form. The organizers of public auctions are specialized trading platforms that have the right to conduct auctions for the relevant type of property. As a rule, it is the Federal Property Management Agency. All information about ongoing auctions is published by the territorial bodies of the Federal Property Management Agency on the official websites torgi.gov.ru and fssprus.ru, as well as in printed publications.

Purchase of collateral real estate with the consent of the creditor bank

Transactions of this kind are carried out with the consent of the lending organization and under its control. The order is:

the buyer transfers the required amount to the bank and the seller’s loan is closed;
the creditor notifies the registration service in writing about the repayment of the obligation and the need to remove the object from collateral;
a purchase and sale agreement is concluded, the buyer’s ownership is registered in the prescribed manner;
if the purchase of real estate is carried out using credit funds, a new mortgage is registered, but in the name of the buyer.

Recommended article: Responsibility, rights and obligations of a co-borrower under a mortgage

When completing such transactions, there is a moment that “falls out of sight” of banks: the transfer of an advance or deposit. To avoid fraudulent schemes, it is recommended to transfer an advance after clarification of controversial issues.

Real estate transactions secured by Sberbank follow a scheme worked out by the bank. Read more in the article: Buying an apartment secured by Sberbank with a Sberbank mortgage

What should borrowers do if they decide to sell real estate, but the creditor bank does not give consent? Almost all banks give such consent to alienation, but if the property is pledged to AHML (Dom.rf), be prepared to refuse the sale, they can even write in writing if required. But practice has shown that it is possible to make a deal, notarized and without the consent of the mortgagee. The entire process of completing the transaction is described step by step in another article: Purchasing collateral real estate under an AHML mortgage.

Purchase with the participation of a bank

Of course, it is safer to buy an apartment from a bank. Some lending institutions have even developed special programs for the sale of collateralized apartments. The buyer needs to get a loan from the same bank where the seller took the loan. The bank considers a new borrower and approves a housing loan for the same property under new conditions. The new loan closes the old one, and the previous borrower is released from his obligations.

Elena Myalo, Director of the Mortgage Store BC, GC Central Treasury "Northern Treasury":

“There is a program to replace a person in obligations. SAIZhK, Raiffeisenbank, and VTB24 have such a program. If a person wants to buy an apartment from a display case of collateral, then he can get a loan on special conditions - at the Central Bank rate, at the refinancing rate. The bank issues a loan to the borrower to pay off someone else’s debt.”

But only the apartments of persistent defaulters are put up for auction. The cost of objects is usually higher than market prices due to accrued interest on the loan.

Theoretically, the collateral apartment of an ordinary borrower could be sold using the same scheme. However, in practice, apartments are sold under this scheme only in isolated cases. The bank is not always interested in changing the borrower, and the buyer is not always interested in the proposed lending conditions of the mortgage bank.

Alexander Komarov, director of the Sverdlovsk Agency for Housing Mortgage Lending (SAIZHK):

“The mortgagee bank sees the condition of the property and the standing of the borrower, who is in arrears and wants to sell this apartment, and can assess the buyer’s solvency. If the mortgagee bank lends to a new buyer, everything is simple. Everything is done within one day. The situation is more complicated when a potential buyer of an apartment comes to another bank. This is where the conflict of interest occurs. The new bank needs to understand when it will have security in the form of collateral for this apartment, and the first bank needs to understand when it will receive funds in order to have a basis to remove the encumbrance in the form of collateral.”

Through an accredited real estate agency

To do this, contact an accredited company authorized to accompany such transactions. Here they will introduce you in detail to the lots put up for sale, advise you on the advantages and “subtleties” of the objects, and market trends. In addition, they will familiarize you with copies of documents for the purchased property. By contacting an intermediary agency, you can be sure of the legal “purity” of the object; The deposit can be transferred with confidence. But cooperation will be accompanied by the payment of commissions to the intermediary.

Buying a mortgaged apartment from a bank

Many banks operate a Mortgage Real Estate mortgage program aimed at selling property that is burdened with debts or has become the property of the lender as a result of an unpaid mortgage. In order to save on legal costs and the cost of paying for enforcement proceedings, the bank independently searches for buyers, carries out registration, and carefully monitors the removal of encumbrances.

Buying real estate from a bank is the least risky and transparent transaction. When registering for cash, it happens as quickly as possible and with a possible discount of 5-10%. After paying for the purchase, there are no obligations to the bank. In case of insufficient funds, you can count on mortgage lending on favorable terms.

Are there any restrictions when purchasing?

Suppose you decide to buy a mortgaged home from Sberbank and find an interesting offer. However, you should know an important detail - the repurchase of collateralized real estate can only be carried out in the same locality where you are applying for a mortgage. The legislation does not yet allow transactions at the interregional level if we are talking about the presence of encumbrances.

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Purchasing real estate secured by a mortgage

The purchase of housing in new buildings is most often arranged using a mortgage. This is a type of loan agreement, according to which, if the borrower fails to fulfill its obligations, the collateral real estate becomes the property of the bank, which receives the right to sell it and cover the resulting losses.

Recommended article: How to buy an apartment with a mortgage in another city - procedure

Buying real estate from a bank with a mortgage has undoubted advantages:

the bank offers a good interest rate for using borrowed money;
ready for a long term loan and a minimum down payment.

But there are also disadvantages. The supply of such housing is usually limited. The lender tries to shift the problem of registering previously living tenants onto the buyer.

Risks: self-registration

The purchase of real estate with collateral can be completed independently. Lawyers recommend:

carefully review the original documents for the property being purchased;
find out from the seller whether the lender has written permission for the sale; if in doubt, contact the bank yourself;
do not rush into transferring the advance;
In the purchase and sale agreement, enter specific terms for the discharge of residents and the transfer of keys to the apartment;
It is better to place the funds due in a rented safe deposit box, to which the seller receives access only after the transaction is completed.

What else to consider in the purchase and sale agreement, read the article: Sale and purchase agreement with a mortgage - important points for the seller and buyer.

The procedure itself for registering a transaction for purchasing collateralized real estate with a mortgage is complex, and of course it is easier when the mortgage bank and the buyer’s bank are the same. But the main requirement of banks, except Sberbank, is the availability of a down payment that can fully repay the amount of the sellers’ debt. Sberbank is so far the only bank that takes risks. And the deal is going its own way. First, buyers are brought into the existing mortgage, that is, the sellers’ mortgage is also registered for the buyers (the debtors are now both sellers and buyers), then after registering the first mortgage, the second stage is the removal of the encumbrance (collateral) according to a letter from Sberbank with the simultaneous registration of the mortgage agreement. The mortgage agreement is registered with a representative of Sberbank, the state fee is 1000 rubles divided by the number of parties to the agreement (for example, a bank and two buyers pay 334 each).
To support the transaction, it is better to contact an experienced lawyer or get comprehensive advice from him.

Risky: acquisition in enforcement proceedings

But there are situations when the collateral property is forcibly transferred for sale. This happens with real estate aggravated by debts, when restructuring and deferment did not lead to the desired results. Then, by court decision, the apartment or house is subject to sale at open auction.

What a buyer needs to know who has taken the risk of purchasing collateralized housing at an auction:

minor children may be registered in the apartment, which immediately makes such a sale transaction illegal and contested;
enforcement proceedings are a complex procedure during which bank employees and bailiffs make mistakes, which gives the debtor the right to challenge the forced sale in court;
most often, both the bank and the seller company shift the process of eviction of the debtor to the buyer, so you need to be prepared for conflict situations;
if the object is interesting, the initial cost may increase during the auction.
debt for utility bills, always find out personally the debt of the sellers for the apartment or jointly obtain certificates of debt.

An undoubted “plus” of this purchase option is that after several unsuccessful auctions, the initial price of the lot is significantly reduced.

And more about risks: minors in a secured apartment

Purchasing real estate with collateral requires paying attention to one more point: there are children under the age of majority among the co-owners or among the registered residents.

Why is this happening? Purchasing an apartment using maternity capital requires further registration of children as homeowners, along with their parents. But often, bank lending is also used as a source of financing. If the borrower is unable to service the debt, it would seem that the best solution is to sell the property and pay off the debt to the bank. This can be done, provided that the interests of the children are not violated.

We list the problems that the seller has to solve additionally:

obtain the consent of the guardianship and trusteeship authority to sell the collateral;
buy or provide minors with alternative housing that meets sanitary, hygienic and living conditions, the area of which is no less than that allocated for each child in the alienated apartment.

Banks, of course, provide for such cases in advance and before providing shares to children, they ask the guardianship authority to write in the order: “the transfer of shares belonging to minors as collateral to the bank is allowed and subsequent alienation is allowed.”

Of course, the above difficulties fall on the seller. But their solution will take time, which increases the time frame for concluding a purchase and sale agreement.

This is interesting: How and where to buy a repossessed apartment for debts

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Is it possible to sell an apartment purchased with a mortgage?

About real risks

Remember that all transactions are carried out only through the bank that issued the mortgage loan. If some intermediaries communicate with you and demand a deposit of several hundred thousand, this should raise suspicions.

Important!

Be sure to review the documents that form the basis for selling your home with a lawyer. He definitely won't miss the details. For example, it is worth checking that the papers indicate a clause on the eviction of tenants. Otherwise, they will have to be evicted through the courts, which will delay the process of obtaining an apartment.

Another simple but important tip concerns price. There is no point in buying distressed housing as collateral if the difference between the proposed price and the market average is about 300 thousand rubles. The benefit begins only in cases where the supply is below the market.

It also happens that the bank refuses a new buyer. This usually happens in cases where the latter has problems with his credit history. Sometimes bank employees set additional conditions. For example, they require the mortgagor to pay 50% of the cost of the mortgage.

If you have the required amount, you can come to an agreement, sign the agreement with a notary, and pay the required part. After this, the transfer of ownership rights is carried out according to the standard scheme - with the signing of a purchase and sale agreement. In this case, there are usually no pitfalls.

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