Forced Sale and why the term should not be used

The Australian Property Institute (API) recently updated its guidelines on "Addressing the Concept of Forced Sale", which will take effect on 1 July 2023.

While the concept of a forced sale has been prevalent for some time, the API’s Guidance Note advises this should be avoided or not used. The definition of market value, which is the bedrock of the valuation profession, revolves around a transaction between a "willing buyer and willing seller" without compulsion. However, in some instances a seller may be in a position where they are compelled to sell, thereby facing a situation where they must liquidate their position quickly and possibly accept a lower price. This is where the term "forced sale" originates.

Historically, financial institutions used this term when calling upon a mortgage to recover a debt from a defaulting borrower, usually referred to as a "mortgagee in possession". The concept of a forced sale was based on the mortgagee’s need to recover their debt within a short timeframe, say over 45-60 days. In this situation, the concept of a "willing seller" is not met, and a sale must be achieved, possibly resulting in a lower price than what the seller may achieve if not compelled to sell. The term "fire sale" may also be used interchangeably, although not usually associated with real estate. A forced sale is not only associated with a mortgagee though and may apply to any scenario where a vendor is compelled to sell in a restricted time period or the asset is not adequately exposed to the market.

In the past, it was not uncommon for real estate agents to use the term "mortgage in possession" when advertising properties for sale on behalf of mortgagees. This was done to generate more interest by creating a sense of urgency or a "Must Sell" scenario, hinting that a bargain might be had. However, most lenders no longer engage in this practice and will generally only resort to taking possession as a last resort after all other avenues have been exhausted. As such, most lenders and their debt recovery agents, no longer use the term "forced sale" and actively discourage valuers from using it when undertaking valuations for "asset realisation" purposes.

With the recent tightening of monetary policy by the RBA after a long period of low interest rates aimed at curbing inflation, many borrowers are experiencing mortgage stress and substantial increases in loan repayments. Those who bought at the peak of the market and with minimal deposits may now find themselves in a negative equity position. While the unemployment rate remains quite low (last quoted around 3.6%), and people feel relatively secure in their jobs, instances of compelled selling should remain low. However, if interest rates continue to rise or the economy enter a recession (as predicting by some economists), there many be an increase in distressed selling, which could increase supply at a time when demand may be falling. Some commentators say this would have negative consequences for the market, disrupting the equilibrium between supply and demand, further impacting those wishing to sell.

Instead of using the term "forced sale" Acumentis use the term "Constrained Circumstances" which complies with the API guidelines. This term refers to a situation where a property may have limited exposure to the market, and Acumentis indicates a value range within which the property value may reasonably sit.

Gerard Clarke
Director – Risk & Performance
— Brisbane Property Valuers
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