Is it worth buying real estate from enforcement? (Part 2)

Benefits, risks, and practical advice in case of an enforcement purchase

Intermediary companies in the enforcement process: Necessary expertise or overpriced service?

In the previous part, we left off with the fact that anyone can participate in an enforcement auction. Doktor Utriusque’s first, non-legal, question to his dear client was why they wanted to commission a company for an astronomical sum for a task that they could perform themselves without any special expertise and without much time? In this specific case, the astronomical sum was a nice, round, six-figure minimum fee and 5% of the property value, plus a success fee. Searching among properties slated for enforcement, registration, and bidding does not require special expertise; anyone can do it easily.

Doktor Utriusque’s second, also non-legal, question was how a company that provides a service which seems heavily overpriced and offers little extra service can operate profitably. Can they type zeros faster and press the bid button quicker? Or can they bid on properties that are not in the system, or perhaps the bidding closes a bit later for them than for other mere mortals? Beware, scammers! Naturally, the latter suggestions do not exactly point toward lawful operation. Unfortunately, Doktor Utriusque has seen a thing or two, and no better solution really occurred to him. This suspicion was not dispelled by either the “managing director” appearing during the personal meeting—evoking a Camorra capo—or the information that came to light in the Schadl-Völner case. In short, even before reading the contract, the whole story stank like garum.

Not surprisingly, the contract confirmed the initial expectations; the main problematic points were as follows.

Pressing the bid button for a fortune: Is the intermediary worth it?

Numero uno. The contract basically covered two things: one was reviewing the enforcement database (so-called “market research”) based on specified criteria, and the other was the auction bidding itself. The commission fee was divided quite disproportionately so that 50% of the fee was for preliminary market research, 25% for all sorts of administrative fluff, and 25% for performing the bid itself. If we contract with the company and there is no property we like, we can still pay 75% of the commission fee without having received anything in return. For the sake of the math, this is approximately 3.75% of the property value, which in the case of an average Budapest apartment, is around 2,000,000 HUF. It is not a great deal from the client’s side.

Success fees and hidden costs during auction intermediation

Numero due. The commission fee would have been due to the company even in cases where nothing justifies it. For example, if someone outbids us and takes the property from under us, an amount around 90% of the commission fee (4.5% of the property value) must still be paid. The situation is the same if the bailiff cancels or invalidates the auction, and so on.

Numero tre: To offset the above, there was indeed a provision stating that in the event of an unsuccessful auction, the company would continue its “blessed” activities free of charge for another 6 months. Unfortunately, this part was full of general fluff and no specifics: the company tries, researches, does its best, etc. If the 6 months expire, the commission fee in the millions is likewise payable for nothing in return.

The costly termination option

Numero quattro: Ordinary termination of the contract is indeed possible, but 50% of the commission fee is payable even then. Overall, the contract can be summarized such that the client is obliged to pay heavy sums for everything, while the company is obliged to do nothing in return.  The client either gets a property for their money or they don’t. It is as if we were spinning a roulette wheel.

The importance of the land registry title: How to filter out scammers?

As a further addition to the story, the dear client was being offered a property that had been auctioned off about 10 years earlier.  Of course, the 10-year-old property price was tempting. Naturally, Doktor Utriusque indicated to the company’s “Gizike” that he had requested the land registry title and not to play us for fools. Gizike even got offended by what I was saying, claiming the auction of the property was in progress and that we should just sign the contract boldly.

Listen to our lawyer

Doktor Utriusque quietly noted that the property is under auction exactly as much as Doktor Utriusque is a member of the British Royal Family and is only a lawyer in Budapest as a hobby. We should believe the land registry title, not Gizike, however pretty she may be. In the end, no contract was signed, and fortunately, the kind customer realized that this was not the company with which he would be doing the deal of his life. Unfortunately, not everyone fared this way; there were those who lost more than 1,000,000 HUF.

Buying real estate from enforcement: To whom is this form of investment recommended?

Even if we do not contract with a scamming company but try to buy at an auction ourselves, it is still worth proceeding cautiously and thoroughly considering the pitfalls. Fundamentally, an enforcement purchase may be interesting for those who have deep pockets and have time, i.e., investment buyers. This is because payment must be made immediately, but years can pass before we take possession. The other main risk is that we do not always know what we are getting for our money, as in many cases, the property cannot be inspected.

Fun fact at the end

While writing, I looked up the company in the commercial register out of curiosity to see how it has performed over the years.  Well, following an involuntary strike-off, it is currently under liquidation. It seems the business model was not that good after all.