There was a moment in time when it seemed every HGTV show pictured investors buying foreclosure properties at half their value, renovating them, and selling them for a huge profit. It caused a bit of a stir up in the GTA, especially given our high home prices. Buyers thought: “Where are our half-priced foreclosure properties”?!

The thing about living in a high-demand area, like the GTA, is that we do not have any “cheap” Power Of Sales or Foreclosures. The legal framework in our Mortgage Act protects homeowner’s equity. Pair that with high buyer demand, and almost all Power Of Sales sell close to market value. Do they sometimes sell a bit below market value? yes, but they also come with significantly more risks. So at the end of the day, any savings are immediately negated by the additional risk.

Are you facing foreclosure on your own home? Read about the benefits to selling your home with a Realtor before foreclosure or power of sale. 

 

The Foreclosure and Power Of Sale Process In Ontario

There are two legal mechanisms for lenders to pull their equity out of a property when a homeowner is in default.

The first is a foreclosure. Foreclosures are not common in Ontario because they require a court hearing. Foreclosures are also more costly to coordinate. Instead, Lenders in Ontario mostly use the Power Of Sale method.

A Power Of Sale is a legal right granted to lenders under the Ontario Mortgage Act. It allows lenders to force the sale of a home once a homeowner goes into default. The process is rather simple: 

• Once a homeowner misses a mortgage payment, the lender sends a Default Notice. 
• If the homeowner fails to catch up on the payment, the lender sends a Notice Of Sale Under Mortgage. 
• After that, homeowners get a Redemption Period to catch up on missed payments.
• If the homeowner does not redeem the mortgage, the property is sold. 

We did not put a timeline on the process because every situation is different. It could take 3 months, it could take a year. 

 

How Do Lenders Sell Power Of Sale Homes?

Lenders have a legal requirement to sell homes for market value. Market value is a bit subjective though, and buyers usually consider the forced sale of a home as a stigma. Banks usually start with an appraisal. Once they have the appraisal value, they will list the home on MLS (realtor.ca).

Because banks need to show they tried to get market value, they have some unusual offer requirements:

1. They price it low, but require all offers to have a 5-business day irrevocability (expiry). Anytime they receive an additional offer, this 5-business day irrevocability is extended. This gives the bank time to field multiple offers before accepting one. (This means it can take weeks to get your offer accepted in a heated market). 
2. Or, they only allow offers after 10-business days on the market. (This also ends up in competition). 
3. Or, they price the home at market value and start accepting offers at any time. However, the lender will only accept the list price. If they cannot sell at the list price, they will lower the asking price until someone pays the list price.

The bank’s main priority in any Power Of Sale is to fulfill its legal requirements and to get its funds back.

 

Risks when buying a power of sale or foreclosure in Toronto

Risk is one of my biggest concerns when I have buyers looking at Power Of Sale properties. In a traditional sale, the homeowner and the listing agent must disclose any material defects with the home. That means the homeowner and agent would need to tell you if they know about any basement cracks, mold in the attic, or the city’s plans to build a railway through the backyard. 

When you buy a power of sale, it comes with no representations or warranties whatsoever. The bank has never set foot in the home, and the bank’s realtors do not enter the home either. The home is in as-is condition, and includes concerning clauses like: 

“The Buyer confirms that the Buyer shall accept the property on an “as is” basis without regard to the degree of completeness, state of repair, location of structures, walls, retaining walls or fences and subject to any judicial, municipal or other governmental by-laws, agreements, restrictions or orders affecting or regarding the property’s condition or use (including inspection reports, deficiency and other notices, work and other orders), as well as any registered restrictions, agreements or covenants which run with the land. The Buyer is solely responsible for any damages to, or deterioration of, the premises from the date of the agreement of purchase and sale until completion.” 

To me, the most concerning part of this clause is not the as-is status… it’s the fact the buyer is responsible for any damages to the home from the date of agreement of purchase and sale, to the final closing date. That means, if the homeowner walks over and burns the home down, the buyer is out of luck.

This clause also says if the garage was built without permits, you’re out of luck: that garage is coming down.

Another concern is any outstanding liabilities in the sale. While the lender will do their best to clear all loans, utility bills, taxes, etc. on the home before closing, there might be liabilities that are missed. A common one is rental items. That means the home you’re purchasing might come with a $20,000 hot water tank, furnace, and AC rental agreement.

 

The bank can cancel the purchase at any point

And finally… the closing date is not fixed. Once the offer is accepted, the bank can push back the closing date if necessary. And, they have until closing day to cancel the agreement if they cannot give you the free title of the home.

 

The true definition of As-Is

The bank and the listing agent have not seen the home, and thus cannot represent the condition of the foundation, roof, windows, AC, furnace, or the home’s history. What you see is what you get. And while you might know to look at the physical structure, the house might have a history…

• The previous owner could have used the home to produce and sell illegal substances
• The previous owner could have murdered someone in the bathtub
• The city might have just approved a new railway behind the house

You have to be willing to accept there are risks, which cannot be seen in a walkthrough or inspection.

 

To buy or not to buy foreclosure or power of sale homes in Ontario

Many people turn to Power Of Sales because they associate it with discount real estate. However, if there is any discount on the property, it’s because it comes with additional risks. If you’re shopping for a good deal, work with professionals, and take your time to find the perfect home. It doesn’t have to be a power of sale to be a good deal.