Real estate buyers have somehow been conditioned to think that buying a property listed under a power of sale arrangement represents an opportunity for a real deal.
I've noticed some REALTORS® capitalizing on this belief by advertising special websites to find out about these listings and, I've seen REALTORS® advertising the power of sale status right in their property ads for a listing. The truth is, it does make the phone ring. But should it?
While there are different remedies a lender can access when there is default on a mortgage loan, the most common one by far in Canada is where lenders exercise their right - that is their power, to sell a property when default has occurred. After following a strict prescribed set of rules about notice to the home owner and other interested parties, lenders can use their power to sell the property. Note, they do not take ownership.
What many buyers don't know is that the homeowner who defaulted is still responsible for any shortfall in the balance of the debt owing. That's right: A lender who sells a property for less than the outstanding debt, may sue the owner of the property for the shortfall.
And here's the rub: 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, the lender has an obligation to sell the property for fair market value or, they risk being sued by the homeowner. Unlike the homeowner, the lender does not have emotional discretion or motivation. The lender will have had property appraisals done and this will become the guideline for them as it is justifiable in a court of law. If a property is not then sold for that amount or more in a reasonable period of time, they may begin to slowly reduce the price in small increments until a sale occurs.
For a buyer, this means that while they may feel they got a "deal," chances of this are about the same, or sometimes worse than with an owner sold property.
Beyond price, there are other potential risks or downsides buyers should be aware of. Almost all lenders have their own schedules of terms that must be included in any Agreement of Purchase and Sale. For instance, in no cases will they give any warranties with respect to the condition of the property. Heck, they have usually not even seen it! They can also not include any chattels such as appliances or window coverings that may be present in the property as they have no claim on the ownership of those. They may be there on the closing date or maybe not. The schedule usually also includes something a bit scary for buyers and that is, a right of redemption by the owner. This means that at any time, the owner can bring the mortgage back into good standing in which case the sale is called off. In reality, this very rarely happens as the home owner would have mounting legal costs associated with the power of sale proceedings that they would also need to pay.
In any case, I would always recommend that potential buyers of these properties should speak with their lawyer about the contract. No one else, including a REALTOR®, is qualified to give you legal advice.
There are things that you can do to reduce your risk including have a home inspection, making enquiries with the municipality about outstanding work orders, zoning or pending special assessments, checking health unit records for information about wells and septic systems if it is a rural property, performing a search of title for surveys or other pertinent documents and so on. Your REALTOR® and lawyer should be your partner in this fact-finding mission.
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