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Investing in Distressed, Bank-Owned Property is a real estate investment strategy that can yield high returns. It is most ideal for capital growth (buying low and selling high) but can also be applied for income and equity growth strategies.

Repossession and Auction of Properties

When mortgage-borrowers default on their responsibility to make their monthly mortgage payments, the credit officers at the bank will attempt to seek advice from them. Eventually, if the default persists without remedy, the bank will follow due process to recover the balance on the defaulted loan. This process culminates in the repossession and auction of the property.

Distressed, Bank-Owned Property

A mortgage-borrower may take legal steps through court orders and injunctions to prevent the process from proceeding if they can show cause or make good on the loan balance. However, once the process has been cleared by the court, the bank can take measures to repossess and dispose of the property to the highest bidder at public auction. The property will be valued and a foreclosure value assigned. At public auction, the bank may indicate a reserve price, usually the bare minimum at which the bank is willing to dispose of the property.

Profiting From Distressed, Bank-Owned Property Sales

A simple example would be negotiating to acquire a property valued at KES 5M for say KES 3.5M and then disposing of it in the open market for say KES 4.8M or as close to its open market value as possible. The transaction above, after costs, can yield a net profit of KES 1M. Depending on the condition of the property, and if the investor is merely looking to make immediate capital gains on the property, he can even commence the sale of the property as quickly as is legally possible.

In both instances, the circumstances driving the sale is the pressure to meet with the financial obligations arising out of default on mortgage payments. The main distinction is that distressed sales are triggered by the borrower while the latter is triggered by the financier (bank). Both represent an opportunity for real estate investors to make massive profits.

Where is the bargain?

Properties that have come under the hammer are usually sold either at public auction or sale by private treaty. Lenders prefer public auction because they are deemed to be the faster route to disposing of property as opposed to open market sales.

Rather than getting involved in managing property – which is not their core business – mortgage financiers are inclined to offer substantial markdowns just to offload them from their books. This is what makes them great bargains. In addition, except in a sale by private treaty, the lender is not obligated to secure any of the defaulter’s interest in the property. This means that the price may be significantly lower than the market value of the property.  Defaulters ultimately lose their entire investment since there is no legal requirement on the lenders to recover any amounts from the sale of a collateralized property above the outstanding loan.

The best bargains rarely make it to public auction. These are usually referred to as short sales or sale by private treaty. On the initiative of either the property owner or the lender, when the borrower falls behind on their mortgage payments and the lender has commenced legal action to recover the property, the property may be sold. These properties are much more profitable because both the lender and the property owner are highly motivated to sell rather than bother with the cost, hustle or, risk necessitated by public auction.

Short sales are usually win-win for both the lender and borrower, which means both parties are looking to mitigate their losses and are willing to accept less than the full balance owed on the existing mortgage. They work especially well if the property condition is bad enough to reduce the current market value below the loan balance (usually dilapidated properties). At the bare minimum, short sales can guarantee the investor potential returns of up to 15% of market value on securing distressed property. The Land Act prescribes that land or property must be sold at a reserve price when sold under public auction.

Rehabilitation and Restoration

It is important for any investor to understand the process that leads to the auction of real estate properties. It may take an extended period of time between default and completion of the judicial process that approves the sale of a property by public auction, especially where the process is heavily contested by the borrower. This means that by the time of sale, some properties can be collected at much deeper discounts as they may require rehabilitation. Make sure to investigate the physical state of a property on offer. Properties that are occupied tend to be better maintained and would have lower costs of restoration compared to vacant unoccupied properties which tend to be rundown.


Being auctioned is an ignominy – just about one of the worst experiences you could face. It is an unpleasant experience. And auctioneers are possibly some of the most loathed individuals. It comes with the territory. Auctioneers conjure up terror and the disgrace of going into unmanageable debt is unfortunate. But as sure as the sun will rise in the east, it will happen. Setting aside the emotional conflict that may arise from leveraging these situations allows seasoned investors to create an opportunity for themselves. Public auctions in many parts of the world have a much more pleasant “whiff” about them because they are associated more with the voluntary disposal of fine things – homes, art, jewellery and even charitable causes. Not so in Kenya! In the lingua franca, being auctioned is referred to as “kuchotwa”, which loosely translates to “getting scalped”.

According to a 2016 report by the Central Bank of Kenya, The outstanding value of non-performing mortgages stood at KES. 22.0 billion in December 2016 with an average mortgage loan size of KES 9.1 million. While mortgages are not the preferred form of financing the acquisition of property, the same source cites that there were 24,085 mortgage loans in the market in December 2016, a decline of 1.5% from the year before with banks being forced to rein in their loaning practices through tighter credit measures.  With the relaxation of interest capping rules, the market will inevitably see growth beyond Q3 of 2018 after the market bounces back from the slump of 2017. The volume of premium bargains available in the market is deep. This is perhaps one of the most important tools the top 1% of successful real estate investor use to fast-track their capital growth. Time to jump in!

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