Every once in awhile, a foreclosure property will appear on the market and spark the interest of an agent or potential homeowner. Who doesn’t like the idea of swooping and picking up a property deal at a fraction of the price? Buying a foreclosure property can provide some benefits and risks to home buyers.
In Canada, foreclosure home sales are not that common. Still, property foreclosure does happen in Canada, typically using one of two common methods: a judicial sale or a power of sale. Buying a foreclosure property for each of those circumstances includes different guidelines.
A judicial sale involves the lender appealing or petitioning the court to sell the property that has gone into default. A power of sale means that the lender no longer requires court approval to legally sell the property.
Despite the infrequency of distressed-sale properties, if you’re even remotely interested it’s essential to understand the pros and cons of buying a foreclosure property.
No matter the reasons, once a property has gone into default a lender will try to recoup any money lost by selling or auctioning off the property. In the U.S. this often means selling a home for less than market value. In Canada, it’s a bit different. Lenders are well aware of each home’s market value and will often price a distress-sale home competitively. Plus, there’s often quite a bit of legal red tape when buying a foreclosure.
Toronto-based realtor, David Fleming says on the rare occurrence that a foreclosure property does come up on the Multiple Listing Service (MLS), the red tape and predetermined terms and conditions create more difficulty than ease. “I would only advise a client to consider purchasing a foreclosure if they had done so many times before,” said Fleming.
Understanding the risks
A few common hazards when buying a foreclosed property include a general lack of cleanliness, the potential for property neglect or vandalism and dealing with the process of buying from a lender (which can mean more forms, legal red tape and a much longer transaction timeframe). Remember, foreclosure 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 will not be done.
Fleming says that most of the risk associated with buying a foreclosure property comes from the terms and conditions set forth by lenders. The terms indemnify and absolve them from any and all future liability of the property. What does this mean? It means the buyer really must be aware. If there are foundation problems, electrical problems or even zoning issues, the buyer cannot go back to the lender and seek recourse. “There are absolutely no representations or warranties about a property,” says Fleming.
It gets better. Foreclosure properties usually offer restricted viewing access. Some are only accessible during daylight hours — since the lights don’t work as the hydro is turned off — while others are only accessible when the listing agent is present. This inability to truly inspect a property heightens the risk to the buyer. “It really can be a can of worms,” explains Mustafa Abbasi, president of Zolo and managing broker in Toronto, Ontario.
Calgary Realtor, Michael Smith adds that buyers of a foreclosure may require bridge financing before getting a standard or more conventional loan through a mortgage lender. He explains that almost all lenders require an appraisal on a home before a mortgage loan is finalized. But getting an appraisal done on a home where the homeowners are being evicted can be difficult, to say the least. This can often mean having to wait until the new buyer has legal possession of the home, which requires temporary financing to be set up to bridge the gap between closing day — when all money is due — and when the new buyer’s mortgage loan is finalized.
Be prepared for competition
Even with all the risks, the competition for foreclosure properties can be quite fierce. “There are still a lot of buyers trying to find a competitive edge particularly in the hot markets, like Toronto and Vancouver,” Abbasi says. He adds that any buyer interested in a distressed sale must first do their homework. “Know your market and always add in a contingency to the remodel and remediation fund.”
If you decide to move forward, make sure you get solid advice. “This is when real estate and legal advisors are integral to ensuring you get the best possible deal,” says Abbasi.
Unfortunately, not all transactions will be processed using the typical real estate contract process. Some distress sales will be processed using an auction — a situation that can end in hand-wringing and tears. “I’ve personally witnessed foreclosure proceedings, complete with security escorting previous owners out of their homes,” recalls Fleming. In one instance, the homeowners being escorted off the property kept shouting threats about coming back and yelling out that the fight is not over. “As a buyer, I wouldn’t want to get involved with something like that,” says Fleming.
Even if an auction is a quiet affair, it will come with additional rules and requirements if you end up with the winning bid. There are same-day minimum deposits as well as a short deadline for full payment of the purchase price. Plus, if you are successful, you can expect the deal to close within 30 days, following a title search. Anyone still interested in a foreclosed auction should also keep in mind that lenders may not offer a conventional mortgage loan on the property. If that’s the case, you will be responsible for securing funding or coming up with the total purchase price all by yourself.
There are some perks to buying a foreclosure property
While every property purchase in Canada comes with some sort of risk, distressed sale properties offer a unique opportunity to purchase a home for slightly below (or well below) market value. It’s this idea of a deal that makes them so tempting for potential buyers. Still, Calgary Realtor, Michael Smith, warns buyers that Canadian foreclosures just don’t sell for the dirt-cheap prices you see displayed on American home-renovation shows. For the most part, a power of sale home in Canada means a buyer will purchase a home in a more expensive neighbourhood or on a bigger piece of land for a slightly cheaper price.
The best-case scenario, says Smith, is that the buyer purchases a power of sale property fixes it up and then sells it for more through the Multiple Listing Service (MLS). “That would be a great return on an investment.”
Another benefit to buying a foreclosure property is that any liens, back-taxes or mortgage loans from previous owners — which can sometimes occur during a regular property transaction — will probably be removed by the current seller. Why? Because lenders who own property want to sell quickly and liens and back-dated taxes hinder a quick sale.
Things to do and know before you buy the property
If you do decide to move forward and buy a foreclosure property, here are five questions you first need to answer:
- Is your closing and renovation timeline flexible?
- Do you have somewhere else to live in case the property isn’t move-in ready?
- Are you financially stable?
- Do you have professionals able to help with the real estate transaction?
- Do you have real-world quotes for the required renovations?
Remember, with a foreclosure home the transaction can be hampered for any number of reasons. That means a sale may not close immediately, the prior homeowner may end up damaging the home or the property isn’t habitable. Even with these delays, a buyer’s down payment and full purchase price are still due on each legally binding date.
Even if a buyer is financially capable of withstanding these setbacks, sometimes the most stressful part of buying a foreclosure home is not knowing when the actual closing day will occur. The courts will end up telling the buyer when the final possession day will take place and, as Smith has witnessed, this uncertainty can create a “very stressful transaction.”
While the benefits of buying a foreclosure property can be substantial, Fleming wants to remind buyers that buying and flipping a foreclosure is not a “get-rich-quick” scheme. It takes thorough research, excellent access to solid cash-flow and excellent planning. Neglect to do your homework and that great property deal can turn into a “go-broke-trying” probability, says Fleming.