I often get asked about Foreclosure properties (Power of Sales). After 2008 and the housing crash south of the border, many people think that they can get a deal on properties in foreclosure. Although this may be true in the states, this is not necessarily the case in Canada. If you are considering buying a power of sale home, please consult with your real estate lawyer and real estate professional first (ie. ME!).
When a home is being foreclosed or sold by power of sale, it means that the lender (mortgagee – ie. a bank), not the homeowner (mortgagor), is selling the property. It is the process that allows the lender to recoup the funds when the homeowner has not paid the mortgage (default on the mortgage).
The differences between Foreclosure and Power of Sale is how it is handled and what obligations the lender/mortgagee has during the process. Because the laws are different in Canada (and even from province to province) and the US, it can be a little confusing.
Here are the main differences:
| Power of Sale | Foreclosure |
|---|---|
| Mortgagor remains on title until the sale | Mortgagee gets ownership of the property |
| Property usually sold using a real estate sales representative | Property is sold by the courts/sheriff |
| Mortgagor is responsible for any losses incurred from the sale | Mortgagor is no longer responsible for the property or any losses mortgagee have taken |
| Mortgagor is entitled to any extra money from the sale | Mortgagee is entitled to any extra money from the sale |
In Ontario, power of sale is used and here is the difference between Power of Sale and Foreclosure:
Power of sale
Power of sale is the process which the lender has the authority to sell (market, list, put up for sale, etc) the property when the homeowner defaults on the mortgage so they can recover the funds lent to the homeowner. In Ontario, the ownership changes from Homeowner to Lender AFTER the house has sold.
The use of a real estate sales representative may be used to list/market the house in a power of sale. Here is the interesting part, the Ontario law requires the lender to sell the house at market value. So it might not be as big of a discount, contrary to popular belief. This is because if there is extra money in the sale (after all expenses are paid – lawyer, Realtor, interest, etc.), it is given back to the homeowner. If there is a shortage of funds, the homeowner is responsible. Example: If the default mortgage has a balance of $300,000 and the house is sold for market value of $400,000, the remainder, after all expenses paid, goes to the homeowner.
Buyers need to be aware that the property’s chattels (the beautiful stainless steel refrigerator, the top of the line front loading washer and dryer, etc) may not be included in the sale if the bank/mortgagee does not have ownership of those items. This brings me to the next point of warranties of the property. Since the mortgagee is selling the property, they don’t want to be held liable for any further recourse of the sale (they just want their money back), so they sell property in “AS IS” condition. They don’t guarantee everything will be working on closing, they don’t warranty anything. But you can protect yourself by making the sale conditional upon a home inspection. Now picture this: a family is trying to make their mortgage payments and for one reason or another, have not been able to make payments. The bank is now taking their home away and is selling it in a power of sale. Do you think they will take care of the house anymore? Or do you think they would be a little upset and frustrated? Do you think they would still maintain that pride of ownership? Buyer beware.
Finally, if you still wish to buy a power of sale home, the lender will usually have their own agreement of purchase and sale with their own terms and conditions and you have to accept it should you wish to continue. So make sure you consult with your lawyer and real estate professional if you want to make an offer on the power of sale. There are many things to consider in the process and too many to explain here, but make sure you do your due diligence before you make a big mistake.
But wait! Now that you’ve come to an agreement with the bank, you still might not get the house. The homeowner can still take their house back if they get their mortgage back into good standing before closing.
Foreclosure
Foreclosure is legal process in which a lender takes over the property. The lender gets ownership and can sell the property at the amount that is owed on the mortgage whether it is at market value or not. Price isn’t important to the lender as they want to get rid of the property and get their money as fast as possible. Any extra money from the sale belongs to the lender and any loss is also the lenders responsibility. The lender can have the property sold by a judicial sale this means that it is legally handled and it can take place in a courthouse or sheriff’s office. The difference here is that they need to sell the house, at whatever cost, just to get it done. So this is why many houses in the US were selling for cheap. Lenders were so desperate to recoup any money that they would list the house to get it sold fast. Without any restrictions of selling at market value, the lenders will sell at a good price so they wouldn’t be responsible of holding the property for any additional time (additional expenses).