Foreclosures and Power of Sales
Many people are drawn to Foreclosures and Power of Sales with the thought that they are a way of buying houses cheaply. This is not necessarily true. Some of these houses are so neglected and in need of repairs that you can get them cheaply, but need to put in a lot of extra money and sweat equity. Is this the deal you are looking for?
Foreclosures and Power of Sales come with numerous potential pitfalls. Here is an explanation of the two types of processes. Hopefully this will clarify some of the challenges these houses present. After all it is buyer beware!
Foreclosure, is an American term for the sale of a residential property by the mortgage lender (mortgagee). This occurs when the borrower (mortgagor) has stopped making payments for a loan secured by the borrower’s home (mortgage). Once the borrower defaults on the mortgage (misses a payment) the lender (mortgagee) can then takes steps to foreclose on the mortgage.
This process takes a specific length of time. The mortgagee or lien holder gets an equitable right of redemption from either a court order or by operation of law (following a specific statutory procedure).
The courts of equity can grant the borrower the right of redemption which allows the borrower to repay the debt. In this case the borrower remains on title. If this happens it makes it difficult for the mortgagee (lender) to sell the home, so the mortgagee (lender) usually seeks to foreclose (immediately terminate) the equitable right of redemption. In other words to change title to the lender's name (called foreclosure). This allows the mortgagee (lender) to put the house up for sale at whatever price he determines will cover the outstanding debt and all his costs.
The mortgagee (lender) can then keep any monies which are over and above his costs. These houses used to go cheaply when there was a glut of them on the market but not now. There is no glut anymore. It still remains true that these lenders don’t care about getting actual market value.
Power of Sales
In Ontario we follow the Power of Sale procedure. The lender can sell the property as dictated by the terms set out in the mortgage. He does not need to get permission from the court. This makes this process much faster than the Foreclosure process which must wait for a lengthy process before the house goes on the market.
The advantage is the lender recoups his debt and expenses much more quickly. The borrower also remains on title and so gets any monies left after all expenses are paid out.
Power of Sale vs. Foreclosure - Similarities
- Involve the forced sale of a house or property
-Start after the mortgagor (borrower) defaults on payment of his mortgage
-Are initiated by the mortgagee (lender)
Power of Sale vs, Foreclosures Who Retains Title
The main difference between the two processes is who retains title to the property;
- In foreclosure the lender (mortgagee) takes title after long process has been followed..
- In a power of sale the borrower (mortgagor) retains title.
Power of Sale vs. Foreclosure - Differences
-Foreclosure is a process used in the US
-Power of sales are used in Canada
- Foreclosures the borrower (mortgagor) loses title to the mortgagee
-Power of sale the lender (mortgagor) retains tile of the house
-Power of sales has a shorter time frame to get the home on the market
-Foreclosures follow a lengthy specified process
-Foreclosures can go on the market without an appraisal
-Power of sales must have an appraisal before going on the MLS system to ensure fair market value
-Foreclosures the mortgagee retains any extra monies after all debt and expenses paid
-Power of sale the mortgagor receives any extra money when all has been paid out
-Foreclosures the mortgagee (lender) cannot be sued for final sale price a house as he is on title
-Power of sale the mortgagor (borrower) is still on title so he can sue the mortgagee (lender) if he feels the home did not get fair market value. Fair market value is the price that similarly sized houses in a similar neighbourhood would receive within the same time frame.
-Once the house has been fore closed the mortgagor (borrower) does not have the right to re-gain the house trough paying all rears and expenses.
-Power of sales the mortgagor always has until the day of closing to pay all arrears and expenses incurred and thus regain the house
The Power of Sale Process to Prove Fair Market Value
Before a Power of Sale goes on the market it must have an appraisal done by an accredited appraiser. This appraisal helps the mortgagee list the home at or above fair market value. Also, the home must go on the MLS system so it is given wide exposure. The mortgagee then looks at offers over a certain length of time. If after say 3 months the home is not sold at or near the asking price then the home’s value is again looked at to determine the fair market value. The price can be adjusted.
Some homes are left is such poor shape by the borrowers that fair market value is very hard to determine because of the cost to bring the home up to market value.
Pitfalls of Power of Sales
Power of sales are bought in "as is" condition with no warranties or disclosures. This means you are buying whatever troubles this house has in it or lien attached to it. If the furnace is a rental then you are taking it over, if there is a lien on say the purchase of the windows then that belongs to you as well. If there are any hidden problems they are yours to fix. Buying a power of sale can be a great deal if all goes well or more likely a big headache. Remember the person who lost the house has probably been broke for quite a while and so things that should have been fixed have been neglected.
You must ask yourself if it is worth the risk. Do you have the extra money to fix unexpected problems?
Did you really get a great deal when the lender must prove that the home was sold for fair market value? Or, are you the one taking all the risk?
How Mortgagors (borrowers) are removed from the House
The court or lender will issue a writ of possession. In other words, the lender gets the right to possess the property. It orders the borrower to leave the property. If the writ is issued by the court then it is also filed with the sheriff, also known as a bailiff or enforcement officer. These are the local enforcement officers in the home’s jurisdiction who make sure the borrowers have vacated the house.
Pitfalls of Foreclosures
In order for the lender to foreclose on a property there is a long process, this causes the house to remain empty for extended lengths of time. Vandalism can occur. The previous owner might be angry at losing the house so they may vandalize the house by taking things of value or destroy the house. The lenders can ask the borrowers to move out quickly and in those cases personal things may get left in the house. This can also lead to vandalism.
In other cases, the area in which the house is located may not be a good and local kids, homeless people or vandals will enter the house. They can destroy it, steal from it and even leave food and garbage in it.
Mould or Water Damage
If a home is closed for months any food or water damage in the house will cause mould to form which can be a very difficult problem to solve. It can also not be insured. You must check your policy.
In a lot of cases there is no electricity in the house so you may not have been able to fully see what you are buying the basement or dark areas. This might cause you to miss potential expensive problems such as a previous leak or crack, termites, missing or incorrectly done electrical or plumbing work.
Water damage or signs of previous water damage is a bad situation to overlook. Perhaps you are looking at a house when your area is in a drought so you don’t see any of the potential problems which this house would be prone to in a very wet spring. This can happen to the best of houses.
In both foreclosures and power of sales the previous owner may have started a renovation and run into money problems which didn’t allow him to finish which leaves you, the new owner, to complete them. In many cases it is a poorly done reno and needs to be ripped out and started over which can be costly. Take a look at what some renos cost.
Another problem may be the state of the yard and gardens on foreclosures and power of sales. This can be a costly endeavor to fix especially if it is a large yard or if the property has been neglected for a long time.
Power of Sale Process
In Ontario, the power of sale process has been implemented to keep the foreclosure process out of the province. It allows the lender to move the process along as quickly as 53 days. Once the mortgage is 15 days in default then the lender issues a notice of sale to the mortgagor. In the notice of sale is the right of redemption date which is a date 35 days after the issuance of the document. This time frame allows one day at the beginning and another day at the end resulting in 37 days in which the mortgagor can redeem the property. The lender (mortgagee) must wait until after that time so the borrower (mortgagor) has time to try and redeem his house.
Power of sales and foreclosure attract many types of buyers. If you are a first time buyer looking for your first home, you may find yourself up against investors and contractors who have been in the game for a long time and can offer the lender a cash only offer. This make it very difficult for you to compete as you would need to include a condition for financing and a home inspection. These conditions are for your protection. As you have read there are a lot of pitfalls with power of sales and foreclosures and you don’t want to be placed in a situation where you don’t have the ready cash to fix unexpected problems.
It is always a very good idea to take your offer to your lawyer along with any paperwork the lender has attached to the offer. This way he can look it over on your behalf. He can also and this is very important do a title search which will show you any liens or encumbrances filed against the house or property. This will allow you to hand in your offer knowing what is on title.
Do a home inspection on the property with a qualified home inspector. Get a written report which will tell you what problems the house has. Some home inspectors are engineers or contractors and can help you to decide it the home is worth buying.
Remember, in Power of Sales, the borrower has until the day of closing to redeem his mortgage and retain title of the property. If you have bought a power of sale and sold you current house where going to go? This can cost thousands of dollars in furniture storage, rent etc.
The lenders don’t usually deal with tenants or their lease so this can leave both of you without a place in limbo.
Maybe you think you are getting a great deal on a house but if it is in a poor neighbourhood which might be trending downwards then you may be mistaken. Check the neighbouring streets. Make sure the properties are well kept. Sometimes in an area taken over by mostly students or renters the homes are in rough shape and this discourages families who want to improve their homes from moving in.
Banks don’t Negotiate
Most mortgagees are banks and they only work 9 – 5 and don’t usually negotiate the price or conditions. It is a process with them not an emotional decision as with first time buyers. The mortgagee is usually just looking to get a fast closing and recoup as much of the debt and expenses as they can.
Take your emotions out of buying a Power of Sale.
Be aware of restrictions on getting a mortgage on homes needing major repairs. The bank may insist that you repair some things in the property within a certain time of closing. This would require you’re having extra money available to do the repairs like a new furnace or electrical repairs.
Sometimes there is a catch 22 where the bank owns the house and refuses to do the needed repairs in order for the buyer to get a mortgage and the same bank won’t give the buyer a mortgage without the repairs being done.
Make sure you have a construction loan or other financing in place before firming up any offers.
In other words definitely put in a financial clause to protect yourself so you know that you will receive the financing you need.
The days of grabbing a bargain with a Foreclosure or a Power of Sale are over. There is not a glut of homes on the market. The ones that are in a good neighbourhood then there will be multiple offers and the home will get fair market value right off the bat.
Know the home values in the area before you submit an offer. Check out houses that are well maintained and subtract the cost of fixing the Power of Sale. This will give you a better idea of the value of the house.
Set a budget for the home and do not go over it. The bank has no expectation of price. They are not emotional about the house. They just want to get as close to fair market value for the place so they do not get sued.
Homes that are in rough shape may take longer to sell. In these cases the bank may look at 5 -10 or more offers before market value is decided. If no one wants to offer what they first thought of as fair market value then after a certain length of time and number of offers they will accept a lower offer.
Remember each day the house sits on the market the bank or lender will lose more money. They want to get he place sold and closed as quickly as possible.
Remember to keep your emotions out of the buying process.
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