Purchasing/Buying a property under Foreclosure or Power of sale
With the popularity of flipping houses or for those just looking for a deal, buying a home in foreclosure or in a power of sale can potentially go very right for the buyer. Or it can also go very wrong. But all that aside - what is the difference between a foreclosure versus a power of sale, and more importantly – how will it affect my decision to purchase?
Using the definition by Canadian Association of Approved Mortgage Professionals, a foreclosure is “a legal remedy that closes off the borrowers’ opportunity to pay off the debt, leaving the lender as the owner.” In other words – the owner in default is completely cut off, and ownership is given to the lender exclusively. This process is the primary recovery method in BC, Alberta, Saskatchewan, Manitoba, Nova Scotia, and Quebec. While this method hands over control to the lender by the court and entitles the lender to become the owner of the property and keep any type of capital gain - it is an expensive and time consuming process with legal fees and land transfer taxes, and the lender runs a risk of losing money if the property is deemed worthless.
In Ontario – the more common method is the power of Sale , and is used as “an alternative to foreclosure, if a borrower defaults on a mortgage, the lender can force the sale of the property without ownership and use the proceeds to pay off the mortgage.” This process does not usually involve the courts, and the lender is responsible for the proceedings. The advantages to this method are that the power of sale system is a time saver for the lender, it allows the lender to control costs on power of sale proceedings (vs. going through the court system) – and that any gains on property go into the pocket of the owner (not the lender). It is in the best interest of the lender to have the power of sale property appraised and sold properly, or they can be sued by the owner for compensation. The rough framework for the power of sale process is as follows:
“First Step: complete a search of title, to identify all registered interest in the property
Second Step, Notice of Sale issued: a fixed redemption period (usually between 35 to 45 days) begins, during which the borrower may pay out the loan without penalty. If the Notice of Sale expires and the debt has not been paid, the lender may issue a “statement of claim” the lender may sell the property under power of sale”
Moving forward with a purchase, or thinking about it? My advice:
Make sure your financing is 100 percent locked up. I mean 100% - this is not your normal deal. If you are buying in cash – way to go. If not, work with a qualified mortgage professional who is able to look at the deal and make sure it’s doable. Many lenders have restrictions on foreclosed properties – ESPECIALLY if they were former grow-ops.
Work with a real estate agent with experience: be much more suspect for flaws regarding a home in foreclosure than one in a power of sale – especially if the primary method of liquidation is power of sale (i.e. Ontario), as the lender has had to resort to foreclosure for a reason.
Be prepared to go into the deal ready to loose it: set your expectations accordingly. There is risk involved buying property this way, meaning things can pop up that hurt the deal – especially if it is a power of sale. The owner has the ability to pay back the debt and keep the house under a power of sale! Other things such as title issues, financing, liens, etc. can also break it. Don’t bet your heart on the property.
Do Your Homework! Period.