Any Savings for Me in a
Power of Sale or Foreclosure?

I'm often asked by buyers if there are any savings for them in buying a power of sale or foreclosure property. My standard reply is a definite ...

Maybe - It Depends

I know, I know - that doesn't really answer your question. Let me be clear.

Negotiating an offer and buying a property that has been listed for sale by a lending institution may seem like a great idea. You may have heard it's a chance to buy cheap. Well, it's a ...

Common Misconception

This isn't necessarily the case.

There are significant differences between power of sale and foreclosure which I'll describe briefly. Ultimately, though, they have the same result for a homeowner who has defaulted on their contract - they lose their home.

A power of sale is a forced sale of a property, with the homeowner maintaining title, by a mortgagee (lender) due to a default of one or more of the mortgagor’s (borrower) obligations under the mortgage, such as making payments of principal, interest, municipal realty taxes, providing adequate insurance on the buildings and keeping the property in good repair. A ...

Foreclosure

... is the process when a mortgagee, who lent money to a buyer to buy a home, and who had a registered lien on the property, has repossessed it and gained title, to sell after the mortgagor has failed to comply with the terms of the mortgage contract. In other words, the homeowner typically has failed to make their regular payment(s) on time.

In both cases, the promissory note in support of the debt usually contains a recourse clause which provides the lender with a remedy for default. When the lender gains possession of the property, the property is listed for sale and sold. If the sale proceeds fail to generate sufficient funds to pay the outstanding balance of principal, interest arrears and expenses, the lender can file a claim for a deficiency judgment, and begin collection proceedings against the mortgagor.

Buying from an institution can make a purchase more complicated.

These homes may not be in good physical condition, thereby lowering their real estate property values as a result. The owner, or tenant, may have been unable, or deliberately refused, to maintain it properly. Or it could have been maliciously damaged by the occupant.

Sometimes, the house could have been without utilities for awhile. So ...

It Might Be Damaged

Often, these properties listed under power of sale or foreclosure are advertised as fixer-uppers. So, it's important that you know what you're getting into - literally and figuratively.

Because you're not dealing with a private home owner, but instead, a business institution, a power of sale buyer usually has no qualms about offering a exceptionally low price (low ball). That's fine, and it's certainly your privilege. But the lender is likely to counter-offer, that is refuse your offer and make an offer back to you. Along with increasing the price closer to the listing price, they'll also add and change numerous standard clauses to protect themselves.

This doesn't necessarily mean they'll not negotiate any further, but they must maintain a ...

Paper Trail

... to show that they at least attempted to get a higher price. When representing a buyer, I usually recommend they counter the counter ... and try again. In my experience, power of sale sellers will negotiate price and possession date only, and not accept any conditions beyond financing and possibly home inspection. So, if you have a house to sell, you can probably forget trying to buy a power of sale unless you're prepared to take the risk of your home not selling in time to close on your purchase.

And don't expect things to happen quickly. Lenders work at their own pace - usually slow - and during regular business hours ... and certainly not on weekends. So, negotiations might take several days

And remember that you're dealing with a seller who has absolutely ...

No Emotional Attachment to the Property

It's strictly business. Company policy and standard procedure will apply.

In a foreclosure, a lender can actually accept whatever terms they deem acceptable because they actually own the property. They get to retain any equity after a sale.

Contrary to foreclosure, in a power of sale, the lender, who has possession and the right to sell the property, must attempt to obtain fair market value. After deducting what is owed to them, including outstanding principle, property taxes, interest arrears, as well as management, legal and administrative fees, and reimbursing any subsequent encumbrancers (a second mortgagee, for example), the lender must return the remainder of the sale proceeds to the former owner who defaulted and lost the home in the first place.

The lender, of course, would prefer to have the mortgagor pay off or redeem the mortgage without having to pursue the power of sale remedy at all. And this sometimes occurs.

Redemption Clauses

Lenders routinely include clauses in their agreements of purchase and sale with buyers that allow the lender to terminate the agreement if the mortgagor (home owner) redeems, in other words, pays off the loan or brings it up-to-date. The lender can sell the property if no redemption occurs. Power of sale is usually preferred over foreclosure because the lender enjoys the possible benefit of either a sale or a redemption by the mortgagor. But redemption can happen at the last moment. For this reason, buyers often resist the inclusion of a termination clause in the agreement of purchase and sale with a lender selling a property under power of sale because ...

Buyers don't want to commit to a purchase that can be canceled by the lender at the last minute.

However, courts have decided that a homeowner, who has lost their home under power of sale, does not have the right to redeem after a bona fide agreement of purchase and sale has been created and executed. If this were not so, the exercise of the power of sale remedy, as an effective mortgage enforcement method, would be weakened. If a buyer, having invested time and money in the purchase of a property, could not rely on the ability of the lender selling under power of sale to complete the sale, and faced the risk of losing the property as a result of a redeeming mortgagor, the demand for properties sold this way would fall along with prices, and the power of sale remedy would lose significant credibility as an enforcement mechanism.

For properties listed for sale by a lender under foreclosure, there are usually no rights of redemption by a mortgagor since, as stated earlier, the lender actually obtains title to the property. They own it, and have no responsibility to reimburse the previous owner in the event of extra equity in the property after all outstanding principle, arrears and expenses have been paid. So, generally, there are ...

No Worries for the Buyer

Power of sale is commonplace in Ontario, Newfoundland, New Brunswick and Prince Edward Island. Foreclosure is the norm in all other provinces, as well as in most states in the USA.

Because the lenders have little to no knowledge of the property, they'll ...

Not Warrant Anything About the Property

For example, even if there are appliances physically in the house, they won't include any reference to them in the real estate contract. They'll not warrant (guarantee) that the furnace will be in good working order, or that the air conditioner will be working when you start it up next summer.

No Promises - None

In other words, buying a power of sale or foreclosure property is pretty much at the buyers risk. So, if you're successful at negotiating what you feel is a price below market value, it's probably because the property is in poor physical condition, and because you're assuming all the risk in the transaction.

By the time you've made all the repairs and renovations to bring it up to some reasonable standard, in many cases, you might just as well have bought a similar home - in better condition - from a private home owner.

So, any savings in buying a foreclosure or power-of-sale?

Probably Not

Visit my page on real estate terminology for a definition of power of sale.

A detailed explanation of power of sale and foreclosure is beyond the scope of this website. Information offered on this page or anywhere on this website is not to be construed as legal or financial advice. If you wish to learn more about these proceedings, I advise you to consult with your real estate lawyer or accountant.

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