Most Canadians have heard about homes being foreclosed on right and left in the beleaguered U.S. housing market. Many newspapers are running ads that promise to show Canadians how to cash in on undervalued properties south of the border – Florida waterfront condos for pennies on the dollar, anyone? What Canadians may not realize is that foreclosure is not a uniquely American phenomenon. Though the incidence is relatively low in our stable real estate market, properties are foreclosed on every single day in Canada. What is a foreclosure, how does it work, and what are the advantages for the average Calgary buyer who is looking for a home?
What is a Foreclosure?
Foreclosure results when a homeowner misses consecutive payments to his or her lender (usually 3 months of payments) and has no means to catch up. This is called distress, and it almost always leads to foreclosure. Once a lender starts the process – usually after written notice of a missed payment has been issued to the borrower, and more than 15 days have elapsed with no payment - it is very difficult for the homeowner to reverse it; legal fees and interest charges pile up quickly, and unless the homeowner can come up with a large sum of money, the property will eventually revert to the lender.
When the foreclosure process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and on top of that, if there is a recourse clause in the mortgage loan, the mortgagee – in other words, the mortgage holder, the bank – can go after the homeowner for the remainder if the sale does not bring enough to pay the existing balance of principal and fees.
It’s a distressing situation, all right. We would not wish such a painful experience on anyone. That being said, it does happen. Once the home has been repossessed by the lender, it’s fair game for purchasers. That’s where you, as a buyer, come in.
Two Types of Foreclosures in Canada
So that you can understand the terminology – and hopefully avoid this happening to you, ever - there are two main ways that a foreclosure can occur in Canada.
Foreclosure by judicial sale, also known as judicial foreclosure, involves the sale of the mortgaged property under the supervision of a court, with the proceeds going first to fulfil on the mortgage; then to any other lien holders; and, finally, the rest goes to the mortgagor (the borrower, homeowner) if anything is left. Under this system, the lender initiates foreclosure by filing a lawsuit against the borrower.
Foreclosure by power of sale, also known as non-judicial foreclosure, is by far the more common form of foreclosure in Canada and it is made possible with a simple Power of Sale clause being included in the mortgage contract. This process involves the sale of the property by the mortgage holder without court supervision. This process is generally much faster and cheaper than foreclosure by judicial sale. The order of payout is the same as in a judicial sale, with the mortgage lender getting the proceeds of the sale first.
How to Buy a Foreclosure
Foreclosed properties, like the vast majority of all properties for sale in our province, are listed on the Calgary MLS. When the listing comes on the market, we will see it – and so will you, if you’ve signed up with us to receive all new property listings within your price range and search criteria, by email. Just as with any other property, if you are interested in the home, we will make an appointment to view it together in person, and have it professionally inspected if you are seriously interested in purchasing it.
If, after seeing the foreclosed property, you want to submit an offer, there are a few things to consider.
Foreclosure Investment – Pros and Cons
Because a foreclosed home is not being sold by its owner, but by the bank who originally issued the mortgage, there are some things that may differ from the experience of buying a typical Calgary home. Here is a short list…for more details on any of these points, feel free to contact me. We would be glad to answer your questions about this or any other specialty type of sale, and help you navigate the process.
- There will be no guarantee or warranty on the property; everything is “as-is” – so you can’t be sure the appliances work or that the suspicious stain on the ceiling isn’t water damage. An inspection is always recommended for power of sale properties.
- The offer may need to be left open for acceptance for a longer time period. Foreclosure or power of sale properties may take days for the bank’s lawyers to receive the offer, review it and make a decision. In the case of a Judicial Sale, offers must be approved by the court.
- There may be less flexibility in terms of negotiating price and other important points, again because the bank is not acting alone.
Most prospective home buyers here in Calgary who have heard of foreclosures have one idea in common: getting a huge deal. They all tend ask me if it’s really true you can get a foreclosed home for next to nothing. I think people have seen too many ads for police auctions or something!
While it is possible to get a foreclosed home below market value, it’s important to put any unrealistic expectations about price on the shelf now, to avoid disappointment later.
A lender who sells a property for less than the outstanding debt, can sue the owner of the property for the shortfall. So the lender has an obligation to sell the property for its “fair value”. No rock bottom prices here! By the same token, the owner of the property may sue the lender if they can prove that the sale was made for less than the value of the property – so there’s a double reason for the lender to demand a reasonable price for the home – they don’t want to lose money or get sued.
So who decides what “fair value” is? The value of the property is determined by a professional appraisal, but as any Calgarian knows, a property assessment may not have a whole lot to do with market value. In the final analysis, only listing a property for sale on the open market, at a fair price, will result in market value being achieved.
On the plus side, banks usually don't want to hold on to properties. They are not in business of property management; they often like to liquidate the property as soon as possible. So any offer that’s close to the asking price probably won’t be rejected out of hand; the bank will likely sign it back, if not accept it outright, to keep negotiations open.
When planning to invest in a power of sale home, it’s important to have professional advice. I would be happy to consult with you in person and recommend an experienced real estate lawyer who can provide you with an invaluable legal opinion when the time comes to make your purchase.