Lori Hanna

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Bank Sales &

Fixer-uppers

buy low - sell high

The Market “correction” of all pricing is now under way. The bottom has dropped out of demand, rents are falling, and lessors are renegotiating leases and making what concessions are necessary to get tenants to stay. Vacancy is rapidly increasing. Sales volume is decreasing. The prices of properties that do sell are falling, and Cap rates are going up. Credit has all but dried up, and what is available is expensive with unattractive terms. Foreclosures are increasing. Developers with completed projects are selling at fire sale prices, or filing bankruptcy if unable to raise more capital. Operators are in survival mode, trying to keep NOI high enough to cover their payments.

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You ask, we answer...

If a homeowner stops paying their mortgage and defaults on the loan, a power of sale by the lender allows the home to be sold to pay back the mortgage.

There are other ways for homeowners to default on a mortgage besides not making their mortgage payments. Mortgage agreements will have loan covenants, or obligations, that the homeowner must follow. This can include maintaining the property and paying their property taxes. Not fulfilling these covenants or obligations will mean that you are breaking the terms of your mortgage agreement, or defaulting on your mortgage.

The lender will demand that the homeowner repays the full amount of the outstanding mortgage balance. If they fail to do so, and the borrower has defaulted, a mortgage lender can either go through with a foreclosure or a power of sale depending on the province. Once a mortgage has been defaulted, the lender will try to sell the property to recover the money that they lent to you.

A power of sale is most common in Ontario, Prince Edward Island, New Brunswick, and Newfoundland and Labrador, while foreclosures are most common in the rest of Canada, including Quebec, British Columbia, and Alberta. Even though a power of sale can sometimes be generally referred to as a foreclosure, an actual power of sale differs in how the home is sold.

Foreclosure

In a foreclosure, the mortgage lender will need to go to civil court to get an order of foreclosure. This is a lengthy process and usually results in the judgement being granted. The judgement in the order of foreclosure will order that the right and title of the homeowners in the mortgage will be foreclosed, with the mortgage lender now holding the title of the property. Now that the lender has taken possession of the home, the lender will then sell the home on the open market.

Since the lender owns the rights and title of the home, the lender will keep all of the money from the sale of the home. If the sale of the home did not cover the amount of the mortgage, the lender cannot go after the borrower for the difference.

Power of Sale

The meaning of a power of sale is hinted at in its name, where the lender has the power to sell a property. Once the homeowner is evicted and the home is sold, the proceeds of the sale will be used to pay the outstanding mortgage balance, the cost of selling the home, such as legal fees and real estate commissions, and to pay off any other creditors with a lien on the property such as a second mortgage.

If there is any money left over, these excess funds will go to the homeowner. If the sale of the home did not cover the mortgage and selling costs, the mortgage lender can go after the homeowner for the difference.

If you’re facing a power of sale, you will be given a notice period before your home is sold. If you can bring your mortgage back to good-standing by paying arrears or by fully paying off the mortgage, you can prevent the lender from selling your home. For example, Ontario power of sales can be cancelled if the borrower is able to pay the amounts owed through their Right of Redemption.

However, finding other lenders that are willing to let you borrow money to pay off your defaulted mortgage can be difficult.

  • A general lack of cleanliness
  • The potential for property neglect or vandalism
  • Dealing with the process of buying from a lender (which can mean more forms, legal red tape and a much longer transaction timeframe)

Remember, Power of Sale homes are often sold as-is, which means the place will not be cleaned, all items will remain in place and will not be removed, and the overall care and maintenance of the property is debatable.

Most of the risk associated with buying a Bank Sale property comes from the terms and conditions set forth by lenders. The terms indemnify and absolve them from any future liability of the property. What does this mean? It means the buyer really must be aware. If there are foundation, electrical, or zoning issues, the buyer cannot return to the lender and seek recourse. “There are no representations or warranties about a property,” its Buyer Beware.