Syovata Ndambuki

Ordinarily, most property owners prefer to hold on to their properties for as long as possible. Understandably, real estate is perceived as a form of generational wealth – until the 3 D’s come knocking. 

In real estate, the 3 D’s stand for Debt, Divorce and Death and they are the biggest motivators for people to sell their property. These 3 D’s are also associated with distress sales. And while these incidents may be unfortunate for the owners, they are an opportunity for many aspiring investors. 

What is a Distressed Property

Distressed properties are homes or other types of real estate assets sold below market value to attract buyers fast in a bid to solve the owner’s financial distress. Properties used as collateral in bank loans make up the biggest percentage of distressed properties in Kenya. 

When a property is used as collateral in a bank loan, the bank registers a “charge” on it. According to section 96 of the Land Act:

96(1) Where a chargor is in default of the obligations under a charge and remains in default at the expiry of the time provided for the rectification of that default in the notice served on the chargor under section 90(1), a chargee may exercise the power to sell the charged land.”

This is an example of how the law empowers banks and other financiers to recover their money from loan defaulters. Distressed properties are more common during economic downturns when most borrowers are unable to service their loans.

Why Banks Sell Distressed Properties

Banks are not primarily in the real estate business. However, to ensure they recover every outstanding loan amount owed by borrowers. They commonly ask for collateral or security when loaning borrowers and Real estate assets are commonly used as security in Kenya and the world over. 

When a borrower defaults, banks do not necessarily sell the properties taken as collateral to make profit. Their main aim is to recover the loan amount owed. 

Holding onto repossessed properties incurs costs such as maintenance, security and taxes. Banks prefer to liquidate these assets as quickly as possible to free up capital. As a result, repossessed properties tend to be cheaper or slightly below market value – making them great investments for savvy investors. 

Kenya’s Mortgage Market in Numbers

Understanding the mortgage market plays a role in navigating the distressed property market in Kenya. You will gain a clear understanding of the main players and where to look for such properties.

According to the Central Bank of Kenya (CBK), as at December 31, 2023, the Kenyan banking sector comprised 38 Commercial Banks, 1 Mortgage Finance Company, 1 Mortgage Refinance Company, 10 Representative Offices of foreign banks and 14 Microfinance Banks.

The mortgage market in Kenya is mostly dominated by 8 of the commercial banks alongside the one Mortgage finance company. 

Chart 1.0 Source: Residential Mortage Market Survey, 2024 by CBK

Shelter Afrique a wholesale financier, mainly financing developers is also an important player in the mortgage market with a significant number of property auctions.

The Process of Buying Distressed Properties from Kenyan Banks

Buying distressed properties in Kenya starts with identifying the properties. Here are several places to look for properties on auction in Kenya:

Common places to look for distressed properties in Kenya

• Banks and Bank Websites: Banks typically advertise repossessed properties on their websites and through public notices in newspapers. Going physically to the bank and talking to their sales or investment advisors is also a great way to learn more about distressed properties in their listings. 
• Newspaper notices: Public notices are a legal requirement and most auctions in Kenya are first announced in local newspapers. 
• Auctioneers: Familiarize yourself with leading auctioneers in Kenya and look out for their notices and announcements. Banks often engage licensed auctioneers to handle the sale of distressed properties.
• Real Estate Agents: Both auctioneers and banks sometimes engage real estate agents for specialized marketing of distressed property transactions. Follow such agents on social media or simply the agents in your network – whether they know of upcoming property auctions. 
• Online Property Listings: Popular online listings can list properties that are being auctioned in Kenya under the tag, “distressed” or “auction”. You may use these terms in your filters when navigating property listings. 

Due Diligence

Kenyan banks are known for their thorough due diligence when it comes to property transactions. Often, proeprties held as collateral by Kenyan banks tend to have clean ownership documents.

1993

Distressed properties tend to flood the market during economic downturns. Kenya has experienced historic economic downturns in years 1993, 1997, 2007/18, 2020 and 2023. 1993 was one of the worst year for Kenya economically when inflation ht 100%.

However, there is a lot more to due diligence. Distressed properties require a unique approach, compared to new properties. These are some of the things to do when buying distressed properties in Kenya:

• Property Inspection: Distressed properties come in all shapes and forms and their conditions depend on how well the previous owner took care of them. Some are beat up and tired.Thoroughly inspect the property to assess its condition and potential repair costs.
• Title Search: Conduct a comprehensive title search to verify ownership and identify any encumbrances.
• Valuation and Market Research: Understanding the property’s potential market value will help you place a favourable bid. You can obtain an independent valuer to determine the property’s market value or conduct thorough market research by comparing similar properties in the market. 
• Legal Review: Auctioning a property is a legal process with prescribed laws. Engaging a lawyer to review all legal documents and ensure the auctioneer or the bank has followed due process can save you the headache of dealing with post-transaction surprises. 

Participating in Auctions

• Auction Procedures: Kenya has a prescribed auction procedure covered under various laws such as the Land Act, Civil Procedure Act and others. Before participating in auctions, take time to understand the prescribed procedure and ensure the properties under auction have adhered to the rules. 
• Bidding Strategy: Bidding is not a child’s play, especially when competing seasoned bidders. You will need a bidding strategy- but first, attend auctions and see how it’s done. Learn from pros to avoid overpaying or missing out on good deals. 

Related:

High Cost of Properties, Biggest Challenge for Kenyan Mortgage Market

Key Advantages of Investing in Distressed Properties:

• Below-Market Prices: Distressed properties are often sold at significantly lower prices than comparable market properties.
• Potential for High Returns: With strategic renovations and market appreciation, investors can achieve substantial returns.
• Increased Bargaining Power: Buyers may have greater bargaining power in distressed property transactions.

Potential Challenges and Risks

• Property Damage: The excitement of buying properties on auction and getting a below the market price deal can easily cloud your judgement during initial inspections. Sometimes, distressed properties turn out to be more worn out than perceived. They may require extensive repairs and renovations. 
• Legal Issues: Legal issues are the epicentre of auctioned properties. There are very few owners who will gladly let go of their properties, even when they are on the wrong. 
• As the saying goes “the devil is in the details” when it comes to these kinds of transactions. Title disputes, tax disputes and procedural issues may arise after your purchase. Hence, ensure your legal consultant is thorough with an eye for detail.
• Financing Challenges: Securing financing for any property sale in Kenya, is not easy. As such, getting a financier to back you up for your distressed property transaction can be equally or more difficult.
• Auction Uncertainty: Auctions can be competitive, and there is no guarantee of success.

Conclusion

Kenya’s property market is relatively small and investing in distressed properties from Kenyan banks can expand the possibilities. You can start small with land or low income properties as you figure out how the market works.