Owning property is one of the most significant investments you’ll make, but it comes with responsibilities—especially if you’ve taken a loan to finance it. If you’re unable to keep up with your loan payments, your property could be at risk of auction. This guide will walk you through practical steps to avoid property auctions, protect your assets and secure your financial future.
1. Understanding Property Auction Notices
One of the most common mistakes property owners make is ignoring notices from their lender. In Kenya, banks are required to serve a notice to the owner before putting a property up for auction. However, many property owners are unaware of these notices, especially if they rely on P.O. boxes or outdated contact information.
What You Need to Know:
- Â Bank Notices: Banks will serve auction notices to the address provided, often a P.O. Box. Whether you receive the notice or not, the responsibility lies with you.
- Common Pitfalls: Many owners only realize their property is in danger when they see it advertised in the newspaper or when an auction sign is placed on the property.
Pro Tip:
Keep your bank updated with your current contact information, including an email address and phone number, to ensure you never miss an important communication.
2. What Happens During a Property Auction
If you’ve defaulted on your loan, the bank has the right to sell your property to recover the outstanding amount. By law, the bank can auction the property at 75% of its market value to ensure a quick sale.
Key Points:
- Auction Price: Banks are allowed to sell properties at no less than 75% of their market value. This means a property valued at Ksh 20 million could be sold for Ksh 15 million, even if the loan owed is much less.
- Additional Costs: Fees associated with the auction, such as auctioneer, legal, and advertising costs, will be deducted from the sale proceeds, which can leave the owner with very little.
Example:
If your property is valued at Ksh 10 million, it could sell for as low as Ksh 7.5 million (75%). After deducting auction costs and legal fees, you might receive a significantly smaller amount, or even nothing at all.
3. Restructuring Your Loan: The First Step to Avoid Auction
The most proactive way to avoid auction is to approach your bank and request a loan restructuring as soon as you realize you’re unable to keep up with payments.
What is Loan Restructuring?
Loan restructuring involves adjusting the payment terms to make it easier for you to meet your financial obligations. This could mean reducing the monthly payment or extending the loan term.
Important Considerations:
- Eligibility: Not all restructuring requests are approved. Banks assess your credit profile and financial situation before agreeing to any new terms.
- Negotiation: Be honest with your lender about your financial difficulties. The earlier you reach out, the better your chances of finding a workable solution.
Pro Tip:
Approach your bank before you fall behind on payments. This demonstrates responsibility and increases your chances of approval for restructuring.
4. Selling Your Property Privately Before Auction
If your restructuring request is denied, the next best option is to sell your property privately before it’s auctioned. Selling privately allows you to control the sale price and avoid the 75% auction threshold.
Why Private Sales Are Better:
- Full Market Value: You can sell your property for its full market value, which is often higher than what an auction would fetch.
- More Control: You can negotiate with potential buyers and ensure a smooth transaction that benefits you.
Example:
Selling a Ksh 20 million property privately means you can settle your debt with the bank, pay any outstanding fees, and keep a portion of the proceeds.
5. Using the Courts to Buy Time
If all else fails and you’re unable to negotiate with your bank, going to court might help you delay the auction process.
How Courts Can Help:
- Legal Process: Banks are required to follow a strict legal process before auctioning a property. If they skip a step, the court can order them to restart the process.
- Buying Time: Even if there’s no legal error, going to court can buy you time—perhaps a few weeks or months—giving you the chance to sell the property or arrange another financial solution.
Pro Tip:
Use the extra time to pursue a private sale or restructure your debt. Delaying the process won’t stop the auction indefinitely, but it can give you a valuable window to act.
6. Avoid Buying Property Using Proxies
In Kenya, it’s common for people—especially those in the diaspora—to buy property using proxies, such as a family member. This practice can lead to complications, especially in cases of inheritance or family disputes.
What Could Go Wrong:
- Succession Laws: If you buy property in someone else’s name (e.g., your mother or sibling), that property may be claimed by other family members in the event of death or dispute, according to Kenyan succession laws.
- Solution: Buy property in your own name or through a registered company to ensure you retain full control and ownership.
Pro Tip:
Always purchase property in your name or a legal entity you control to avoid disputes down the line.
7. Plan Your Transaction from Start to Finish
Before entering any property transaction, plan the entire process from start to finish. Never initiate a transaction without knowing how you’ll complete it.
Why It’s Important:
- Penalties for Defaulting: Most sale agreements in Kenya require buyers to forfeit 10-15% of the purchase price if they fail to complete the transaction
- Resale Complications: In some cases, especially with apartments, if you default and the seller cancels the sale, you may only get your money back after the property is resold. This process could take years, leaving you without both your property and your money.
Example:
A buyer who commits to purchasing a Ksh 68 million property and defaults could lose Ksh 6.8 million (10%) or more, plus face lengthy delays in recovering any additional payments.
8. Nairobi Property Registration and Ardhisasa System
If you own property in Nairobi, ensure that your title is registered on the Ardhisasa system. Without this, you cannot transact, sell, or use the property as collateral for a loan.
What You Need to Do:
- Title Conversion: Depending on your property’s title type (e.g., RTA, G, AR titles), you’ll need to undergo a conversion process.
- Enumeration: Properties with AR titles, especially in areas like Donholm and Embakasi, require an additional process called enumeration.
Pro Tip:
Work with a lawyer to ensure your property is registered on the Ardhisasa platform. This will ensure that your property remains transactable and available for future use.
Conclusion
Avoiding a property auction requires proactive management and quick decision-making. From restructuring your loan to selling privately or using legal avenues to delay the auction, there are several ways to protect your property and minimize losses.
If you’re facing financial difficulties or legal issues with your property, it’s always best to consult a professional who can guide you through the process and help you secure the best possible outcome.
FAQ Section:
Q: What should I do if I haven’t received an auction notice?
A: Even if you haven’t received a notice, it is your responsibility to keep track of your loan status. Ensure the bank has your updated contact information, including phone and email.
Q: Can I stop an auction by going to court?
A: Yes, you can delay an auction by going to court if the bank hasn’t followed the correct legal process. This can buy you time to resolve the issue, but it won’t stop the auction permanently.
Q: What happens if I default on a property purchase?
A: Most agreements require you to forfeit 10-15% of the purchase price. In some cases, if you’ve paid more than the deposit, the seller may hold onto the additional amount until the property is resold.
Q: How can I register my property on Ardhisasa?
A: To register your property on the Ardhisasa system, you’ll need to work with a lawyer. They will help you convert your title and complete the necessary processes to make your property transactable.
Q: What is loan restructuring, and how does it work?
A: Loan restructuring involves negotiating new payment terms with your bank to make your monthly installments more manageable. This could involve extending the loan term or reducing payments temporarily.
