Home buyers are sometimes drawn to foreclosed properties with the hope of getting a great deal. Foreclosure sales lack some of the consumer protection buyers typically expect, so they must understand the inherent risks, particularly with non-vacant properties. In fact, the risky nature of foreclosures can make them an especially poor choice for first-time home buyers.
First a little background on the process. Once a homeowner has fallen sufficiently behind on his or her mortgage payments, the lender petitions a court to initiate proceedings in foreclosure. At the first hearing, the court gives judgement for the amount owing and sets a redemption period. For residential real estate the redemption period is normally six months, during which the borrower is required to pay the balance owing (plus daily interest). Once the redemption period has ended and the balance of the mortgage is not paid, the lender almost always requests a judicial sale. This involves the court ordering the sale of the home through the normal listing process. All purchase offers must go to the court for approval. Before approving a sale, the court must be satisfied the property was adequately exposed to the market and the offer reflects fair market value. The court has absolute discretion to accept, reject, or counter any offer.
What does this mean to you the buyer? All offers brought during the court proceedings are unconditional and once accepted the buyer is legally required to complete. So, unlike a typical purchase offer where the buyer can collapse or renegotiate the deal in the case of a bad inspection report or loss of financing, with a foreclosure the buyer must be willing to accept the home as is and have rock-solid financing in place. Buyers can have an inspection done prior to the offer, but the condition of the home can change dramatically right up to the time of completion, particularly if the property is occupied. There are plenty of instances where foreclosed owners removed appliances, fixtures, and/or did considerable damage to the property before leaving.
So we've reached possession date, but the previous owner has not vacated the property, or has decided to appeal the court order. Maybe a squatter has moved in. In any of these scenarios the buyers could be subject to a lengthy, expensive, and emotionally draining process to gain possession of their home.
Other potential surprises may await the buyer: is any HST/GST owing? is there an occupancy certificate? what illegal activity has occurred on the property? is there mold or other health hazards? what, if any, maintenance was done over the past several months while the previous owner was going through foreclosure? Foreclosures do not come with Property Disclosure Statements and no warranties are offered.
Yes, a careful buyer can realize substantial savings when purchasing a foreclosed property, but any wise investory will also know of the potential risks involved.
This posting is based on a lecture to the OMREB AGM presented by Kelowna Real Estate Lawyer Peter Borszcz.