EAA Publications
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| The Freshman |
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| Property with negative equity:
buyers beware |
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Mr Wong and his wife had just
returned to Hong Kong after living in Canada for some time.
They found that property prices in Hong Kong had adjusted downward
and thought it a good opportunity to buy a flat. On the recommendation
of an estate agent, they inspected and decided on a unit owned
by Company A. The land search record supplied by the agent showed
that the flat had been re-mortgaged many times and up to that
time there were still three undischarged mortgages. A director
of Company A, who negotiated with Mr Wong on behalf of the company,
claimed that the company was financially sound and it was only
part of the company's normal operation to obtain loans using
the flat as security.
As the price asked by Company A was very attractive, Mr Wong
thought that the opportunity was not to be missed. So he signed
a provisional agreement for sale and purchase and paid a deposit.
Before completion, Mr Wong was informed by his solicitor that,
as confirmed by the mortgagee bank, the aggregate liability
resulting from the several mortgages was $1 million more than
the price of the flat. Mr Wong immediately contacted the vendor's
solicitor, hoping to have assurance that the vendor would be
able to fully repay the bank and complete the transaction. However,
the vendor's solicitor replied that he was unable to contact
the director in charge of Company A. On the date of completion,
the situation remained the same, and ultimately Mr Wong did
not get the flat. The lawsuit against Company A to recover the
deposit is still in progress, but Mr Wong's chance of getting
back the full amount appears slim.
The above case is a clear example of a property with negative
equity. The market downturn aside, if a property is re-mortgaged
a number of times to obtain finance for business, the amount
secured by the property may exceed the value of the property,
thus making it a property with negative equity. Company A, the
vendor, was unable to make good the difference between the redemption
money and the property price. Mr Wong became the victim. As
a matter of fact, Mr Wong, as purchaser, should have been especially
careful after seeing so many undischarged mortgages in the land
search record. He should have requested that the deposit be
stakeheld by solicitors, and a clause be added to the agreement
to the effect that the deposit would only be released to Company
A when it could prove that the balance of the purchase price
would be enough to cover the redemption money. That way, Mr
Wong could at least have avoided losing the deposit.
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