Investing in real estate is something many people are keen about and as a result of their commitment, some investors go the extra length to secure funding to make their dream of owning their own property a reality. Sourcing for and securing funding for real estate could be a serious challenge depending on the terms and conditions of the loan.
In some countries, a mortgage is easy and comes with reasonable terms and conditions. In Nigeria securing a mortgage is a burdensome task for many. For those who manage to cross that barrier, the challenge that they still must deal with going forward is enormous.
Real estate investment requires an incubation period for it to gain value. Value in real estate takes time. While shares can gain value overnight, real estate investment usually takes time.
While a person can borrow money at a high interest and effectively gamble it speculating in shares and if it works out he or she could make an enormous amount of money, the same feat will be rare in real estate. This is one reason a high-interest rate regime is a disincentive for real estate investment.
In Nigeria, if you are fortunate to qualify for a mortgage you must be prepared to pay a high-interest rate. The banks are not real estate investment- friendly. Although the books may state that your interest rate is a certain percentage if you look further and ask questions you should not be surprised that there are several add-ons that will push your interest rate and cost closer to or over twenty per cent.
This cost also comes with quarterly charges, registration and other charges that will significantly increase your cost. This scenario makes repayment burdensome and costly for most investors who have a mortgage on their property.
In a slow economy or a recession, the above scenario could mean serious financial pressure for an investor. If there happens to be a negative change in circumstances, the investor could find it difficult to meet up with their repayment which could lead to a default in payment. If there is a default and it is not rectified, the bank has a right to foreclose on the property and carry out a short sale in order to recover its money.
The bank is not interested in maximising profit for the investor. Their sole aim is to recover the principal loan and possibly interest. Many times, they sell under the value and for an amount that does not cover the loan obligation of the investor. In cases like this, the investor not only loses their initial deposits, repayments made so far and the property they also end up having to pay the bank some additional costs.
Many investors who find themselves in this situation often wonder whether or not they have the right to sell the property.
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An investor who has a mortgage should realise that by virtue of the mortgage agreement, he or she is no longer the owner of the property. The bank’s interest comes first. Usually, the bank takes custody of all the title papers and secures the right to sell the property with or without the involvement of the owner once there is a default that leads to foreclosure.
You should also realise that it is unethical and illegal to sell the property without disclosing to the buyer that there is a mortgage on the property. Remember, you could be charged with fraud if you do not disclose all the legal interests on a property or sell a property that you do not have the right to sell.
However, this does not mean that the property cannot be sold. It simply means that you must take care of the interest of the lender. If the property has appreciated in value, it is possible to sell the property, settle the loan and still make a profit.
What some investors do is to make full disclosure to the buyer and if the buyer is convinced, they ask him or her to pay off the mortgage and receive a letter of release from the bank. The balance can then be paid to the seller. It is also possible to have the transaction managed in such a way that the bank can release the title documents to the buyer. An investor who desires to buy a property that has a mortgage on it should insist on working with the lender and getting full details about the sum total of the obligation on the property. It is safer to pay directly to the bank and ensure that the property documents are released to you or your lawyers.