The Truth About Buying A Property Under Power of Sale

By
Real Estate Agent with RE/MAX four seasons realty limited

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.

Comments (13)

Sylvie Conde
Sutton Group-Associates Realty Inc., Brokerage - Toronto, ON
Broker, Toronto Real Estate

This is a great post, Marg.  I have been involved in a couple of these, on the buyers' side, and it does pay to carefully have your solicitor review the documents.  We've walked away from a couple of homes, but have also made a good purchase or two.

From the selling side, the last listing I had actually received offers ranging from $100,000 below asking to $70,000 above asking.   People assume they can low-ball and get a great deal, but as you say, the lender can be sued, if the property sells below market value. 


Not everyone likes to think about the possibility of losing the home on the day of closing, but if you are up to taking the risk, then do as Marg says, and ensure you partner up with your REALTOR and lawyer.     You want to have someone on your side, looking after your best interests.

May 18, 2009 07:52 AM
Kathy Clulow
RE/MAX All-Stars Realty Inc. Brokerage - Uxbridge, ON
Trusted For Experience - Respected For Results

Marg- Excellent - you have really nailed this one - given all the safeguards built into the normal purchase and sale agreement buying a power of sale is not for the faint of heart. They are a true test for an old axiom "caveat emptor" let the "buyer beware". In these cases what you see is not always what you get if you get anything at all.

May 19, 2009 01:40 PM
Larry Estabrooks
Independent Real Estate Agent - Moncton, NB
100% representation means NEVER DUAL AGENCY !

Marg - I like your post. Here are my comments.

I advise my buyer clients not to bother bidding at the public auction stage in my Province. I advise them to wait until the property is listed for sale by a licensee.

I would like to point out that the legislation is different in every Province. To say that the lender does not take ownership may not be correct in all jurisdictions. The same goes for the "right of redemption".

In addition, the property may be listed for sale by the lender or by the mortgage insurer. These are two different scenarios regarding any sale price that may be considered less than market value. I don't know if the mortgage insurer has a right to go after the borrower for any shortfall in a sale.

May 20, 2009 02:38 AM
Not In Real Estate Any Longer
Autaugaville, AL

Great post.

Not too far off in the past I got a call from a "buyer" who only wanted to know what power of sale properties my brokerage had listed.

I asked him why he was only interested in those particular properties and he responded, "Well, cuz they're the best deals on the market, aren't they?"

I explained to him pretty much what you've stated here, Marg, and he thought I was crazy.

A couple weeks later a younger couple came in looking to buy their first house and the man also asked about power of sale properties.

This convinced me that the general public really needs to be educated in this matter.

Might be worth a seminar....

May 21, 2009 12:17 AM
Marg Scheben
RE/MAX four seasons realty limited - Collingwood, ON
Edey - Collingwood, Ontario

Sylvie - I've done several on both sides.  It can be very frustrating both ways as the seller is also not open to common sense in all cases but is guided by the paper trail.

Kathy - you are so right.  The clasues in most of the POS Schedules can scare even a seasoned investor and so they should.  Buyers really need to know the differences.

Larry - As always, interesting comments.  I have also represented CMHC in their property sales and I don't think the process is any different.

Pam - the public really does have misconceptions about properties being sold under a Power of Sale, don't they?  I'm glad you are busy explaining that rather than exploiting the myth.

May 24, 2009 11:47 PM
Carl Stars
Sutton Group About Town Realty - Burlington, ON

I have rarely found a deal that was a Power of Sale... I guess that is why Canada's Real Estate Values are more consistent in down turns?

Jun 08, 2009 02:41 AM
Bob Dunn
Sutton Group West Coast Realty - Abbotsford, BC

Marg you raise some old standing issues. I remember a time when ad headline would read, "Divorce Sale", "Seller Desperate" even today I see ads that read "Seller will look at any offer". None of these are consistent with our fiduciary duties.

Jun 16, 2009 06:32 PM
Terry Chenier
Homelife Glenayre Realty - Mission, BC

Marh,

This is just another example of, know what you're doing and make sure you cross your T's.

Jun 17, 2009 05:34 PM
Marg Scheben
RE/MAX four seasons realty limited - Collingwood, ON
Edey - Collingwood, Ontario

Bob - isn't that the truth!  I'm always surprised when I see these types of comments.

Terry - we really need to understand our roles for both buyer and seller, don't we?

Jun 19, 2009 01:54 AM
Bob Dunn
Sutton Group West Coast Realty - Abbotsford, BC

I take it that this process differs between Provinces.

In BC when a property is under FORECLOSUREall the owners rights and duties are extinquished. Therefore if the property is sold for less than the charges against it the owner has no obligation to pay the shortfall.

Under a COURT ORDERED SALEthe owners rights and duties are not extinquished and the owner is held responsible for the shortfall.

Historically the lender would commence the action which would be of benefit tothem.

During a good market when market values exceed the charges the lender perfers FORECLOSUREas the owner's rights are extenqished and the lender gains the benefit in way of profit - the sale price minus charges and costs.

During a down market the lender perfers a COURT ORDER SALE in order to enforce collection against the mortgagor for the shortfall.

The courts during the last 20years have shown a reluctance to enforce FORECLOSUREand disentitle the owner to any residual monies.

The buyer's who are so eager to steal a property due to another's misfortune are seldom aware of how reluctant the court can be to force someone out of their home and at times can be quite generous with the Redemption Period.

I had a client years ago who husband abandoned her and their two children, including a new born,  and the courts kept her in the family home for close to eighteen months.

This should have been blog!!

 

 

 

Jun 30, 2009 04:24 PM
Marg Scheben
RE/MAX four seasons realty limited - Collingwood, ON
Edey - Collingwood, Ontario

Hi Bob

It actually sounds much the same except for the terminology.  what you call a Court Order Sale, we call Power of Sale.  The right is conveyed through the mortgage charge and I would bet they are about the same.  Thanks for your great comment.

Jul 01, 2009 12:25 AM
Anonymous
L.CHEUNG

Regarding Power of Sale property, kindly advise whether or not buyer is required to pay GST ?

Thanks

Jul 15, 2009 06:15 AM
#12
Marg Scheben
RE/MAX four seasons realty limited - Collingwood, ON
Edey - Collingwood, Ontario

In general, the rules say that GST applies to all sale of real property unless exempt.  In most cases, a used , personal use, residential property is GST exempt even if it is being sold under power of sale.  The rules can be complex and muddy so it is always wise to seek professional advice.

Jul 16, 2009 01:28 AM