Foreclosed Properties and Power of Sale

It never fails. When I start working with buyer clients, they always ask me about purchasing a foreclosed property or a power of sale property.  The reason they ask me this is because they believe they are going to get a really good deal and pay less for a home.  If you watch a lot of HGTV or TLC home buying shows, people buying homes south of the border may find it a great way to get a good deal but here in Ontario it may not necessarily be the case.  

Disclaimer I'm not a lawyer, or a solicitor and I am not providing legal advice. I am just providing a little bit of an overview of how power sale and foreclosed properties work in Ontario.

If someone who owns a home and has a mortgage on their property doesn't pay their mortgage, after a certain amount of time, the lender is going to want their money back.  The lender could be a bank or institution, or private lender and they want to get paid so one of the remedies that they can invoke would either be a foreclosure or a power of sale.  There are other types of remedies, but these are the most popular. 

To foreclose on a property, requires that the lender go to court. There is so much paperwork and legal procedures involved that lenders prefer not to jump through those hoops, so it tends not to be very popular.

Power of Sale is a much easier procedure, so it is most popular, and it occurs in about 90% of cases in Ontario. There is a law in Canada that says that the lender must get fair market value.  This is key because with fair market value, as a buyer, you are not necessarily going to get the best deal on the street.  When a home goes into power sale there are lawyers involved as well and they will most likely hire a Realtor. 

The Realtor is hired by the lender and works for the lender, not the homeowner and the Realtor is required to get FAIR MARKET VALUE.  The home will be marketed and treated the same as any other home. Whatever the home is sold for, the lender gets their share and any difference is returned to the homeowner.  For example, if the mortgage balance is $200,000 and the home is worth $800,000 and is sold for $800,000, the lender gets their $200,000 back plus legal fees and then the balance of whatever is left over after the realtor fees are deducted goes to the homeowner. You may not get the best deal unless the house potentially has a stigma attached to it (something may have happened in the home or it may have been used for illegal activity) and therefore priced appropriately to reflect that stigma.   

Purchasing a Power of Sale home can be risky.  You are buying the home in an AS IS condition.  What you see is what you get, whether there are holes in the roof or cracks in the foundation. Sometimes it is what you don’t see, you end up with too, such as termites.  

In case you are putting in an offer on a power of sale there are a couple of things you can do to protect yourself.  The first thing is to make it conditional on lawyer’s review as well as home inspection, maybe a few different home inspections. A complete home inspection should look at everything and use thermal cameras and include termite inspection, a WETT inspection if there is a fireplace and a pool inspection in the case of a swimming pool. You also want to verify that the appliances, furnace and Air Conditioner are owned (meaning not on a payment plan) and title can be passed on to you if not you may find out your oven is being repossessed by Best Buy.

The final risk you are potentially vulnerable to in a power of sale property is something called the Mortgagor’s Right of Redemption.  

The mortgagor has the right to pay off the mortgage up until the day of closing.  This is especially risky if you are an end-user of the home, meaning you plan on moving in after closing.  If the mortgagor pays off the balance of the mortgage on the day of closing, you don’t get the keys to your house and you could end up being homeless. If you purchased the home for an investment and it does not close because of the Mortgagor’s Right of Redemption, then it would just be the cost of doing business.

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