Buying distressed properties in Dubai

There are distressed home sellers in the Dubai market. What are the things one should check before approaching and buying from such a seller? Are distressed homes worth it?

In the past two years Dubai has seen property prices fall by 50 per cent, on the back of the global economic recession, leaving many investors facing the stark reality that they can no longer afford to finance the remaining debt on properties, many of which have still to be built, resulting in an increase in distressed sales.

Such sales offer buyers the chance to pick up luxury properties for a margin of the original price. However, it is important to understand the position of the seller before agreeing to a price and/or sale terms.

Alternative scenarios

There are two alternative scenarios involved in a distressed sale in relation to the seller: they could either be an investor, such as an investment fund, which has bought the property independently with no borrowed money, or an investor that has taken out a mortgage to buy the property.

If the seller has no mortgage linked to the property they can put the unit up as a distressed sale through a real estate agent or independently without any other agencies or bodies needing to be involved.

The buyer simply purchases the property in the usual way. Time is usually of the essence and such sellers are often prepared to make hefty discounts, sometimes up to 75 per cent, and cash buyers are often welcome.

However, make sure you check out the seller or sellers before entering into a transaction. The fact that the seller is making a distressed sale means that they are in financial difficulty and there is a risk that the transaction could be set aside if the seller is subsequently declared bankrupt and the sale is considered harmful to creditors.

If the property is complete then checks need to be made on who legally owns the property, and if the title deeds have been registered with the Dubai Land Department. If it's an off-plan unit then it may not yet be registered in the seller's name but should be pre-registered by the developer.

As long as all payments have been made to date, and the seller has an NOC (no objection certificate) from the developer, then the sale is legally allowed.

For distressed sales where a mortgage is involved, the owner can only initiate the sale if there has been no default on mortgage payments or the price is sufficient to clear the mortgage debt.

If the owner wishes to sell at a price less than the mortgage debt the sale can only take place with the co-operation and agreement of the mortgage lender. Situations where the lender will accept less than the debt will be rare as the mortgage lender will be keen to secure a price that covers the debt. In this situation the best deal may not be had but the legality over ownership will be far more straightforward.

Buying a property at auction will secure you the best price. However UAE-based banks have proved hesitant in going down this path for fear of suffering greater losses as the property's value is literally decided by the bidders.

For this reason such auctions have yet to feature in the distressed sale market, although the legal process for getting a property to auction is in place and may come into play in the future.

As is clear from the above there's much to think about before buying a property through a distressed sale. You may get a real bargain but doing the necessary due diligence and ensuring that you have adequate insurance to cover you if anything goes wrong are essential to a successful purchase.

- The writer is a Solicitor and Senior Estate Planning Consultant with Nexus Insurance Brokers LLC, if you have any questions, please email to advice@gulfnews.com