You want a great deal, don’t you?

Many clients over the years have asked us to keep our eyes out for bank sales and foreclosures, in the hopes of scooping a “great deal”.

Everybody wants to buy for a bargain, right?

In reality, these properties only represent 0.2% to 0.5% of the Ontario market.  In Milton, there may only be one or two properties listed at any given time… often there are zero.

Plus, these properties aren’t always the opportunities people think they are.  You’ll have to read on to learn more about that.

So let’s begin by talking about what happens after missing a mortgage payment in Ontario…

The Power of Sale explained

A “Power of Sale” is the most common remedy used by lenders in Ontario.  The lender has the option to sell the mortgaged property and recover their original investment and any costs associated (eg. legal and real estate fees).  The remainder of the profits (if any) are given back to the homeowner, so that the lender is in a position of ZERO balance.  They didn’t make anything, and they didn’t lose anything.

This is different from a foreclosure, where the lender goes through a longer court procedure in order to claim full ownership of the property, seizing all assets in a potentially profitable situation.

The Power of Sale was created to keep foreclosures out of the court system, and to allow the lender to act quickly to get things under control.

When you don’t pay your mortgage, here’s what happens…

Just 15 days after even ONE missed payment, the lender can begin their process with a Notice of Sale delivered to the borrower.  The lender may also send notice if they’re aware of any unpaid taxes, or any illegal activity in the home.

If you’ve breached your original mortgage contract in ANY way, they have the right to send the Notice to you.

After the Notice of Sale is delivered, the lender must wait 35 days, or 40 if the property is owned by a married couple.  (I guess they allow five extra days for the intense arguments?)  This is called the “redemption period” where the borrower has a chance to bring the mortgage back to good standing, or to pay off the mortgage and any legal fees incurred by the lender.

This is the time when most homeowners will try to arrange a new mortgage, or get approved for a second mortgage.  They’re typically dealing with a legal team instead of the lender, and it can be a very stressful time.  Our advice to most homeowners is to list and sell the home themselves as quickly as possible during the “redemption period” if they’re not able to handle the financial burden.  Costs begin to accelerate rapidly if the process continues with the lender.

Next comes the Statement of Claim from the lender after the “redemption period”, and if the borrower doesn’t file a Statement of Defence, the lender asks the court for a Writ of Possession and the sheriff schedules a date to evict the borrower.  Then the sale process begins.

The selling process

The lender typically orders two independent appraisals of the property to come up with a true market value.  The home is listed on the MLS system by a real estate agent, often above the appraisal values.  Some lenders will only review offers after a certain time on the market to strengthen their case that they made full effort to expose the property to as many buyers as possible.

Once the property sells, the proceeds of the sale are used to pay expenses incurred by the lender, including mortgage discharge penalties and the real estate and legal fees.  Outstanding balances for condominium maintenance fees, property taxes, and any additional creditors or mortgagees are paid in a set order of priority, and any remaining money goes to the former homeowner.

If there’s not enough money to cover expenses, the lender either absorbs the cost or they can file a Writ of Execution to recover the remaining balance owing.

Please note that this process is explained for information purposes only, and is not intended to be legal advice.  You should always speak to your lawyer about your best options in any situation related to a non-payment of a mortgage.

Now let’s talk about why you may NOT want to buy one of these properties.

Buying a Power of Sale isn’t always great for you!

There are a few reasons why you may not want to get involved in a Power of Sale process as a buyer.

#1. Slow negotiation

Dealing with a lender and/or their legal team can take days and sometimes weeks.  There’s not the same sense of urgency as dealing directly with a homeowner.  We’ve seen dozens of buyers make really strong offers on these properties, only to be turned away without any rational explanation.

#2.  No warranties

In a “regular” home sale, the seller will warrant that all appliances and inclusions will be in normal working order.  With a Power of Sale, the lender will wash their hands of any responsibility.  You might be able to do a home inspection, but don’t expect anything to get fixed.  If you get your keys on the closing date and there’s a leaking roof, or the fridge doesn’t work, then you’re simply out of luck.  By the way, you’re lucky if the fridge is even included… most Power of Sales are the most stripped down version of a house that you’ll ever find.

Final note… if someone wasn’t making their mortgage payments, you can usually count on the property not being maintainted very well either.

#3.  The lender can cancel ANYTIME

This is the worst one of the bunch.  There’s usually a clause in the lender’s schedule that says they can cancel the agreement ANYTIME before closing.  If the borrower in default comes up with the cash needed to pay everything in full a few days before you’re supposed to get your keys, you could be completely out of luck and have your agreement cancelled.  Your deposit will be returned, but that’s about it.  No house for you!

It doesn’t matter that you may have given notice to your own Landlord, or that you sold your home expecting to move in on time.  If the lender wants to cancel the agreement, they retain that right until the very last minute.  These agreements don’t get cancelled often, but it’s a HUGE risk for most buyers if the lender has a change of plans.

#4.  The lender holds out for as much as they can

Protective measures are in place to ensure the lender sells for the best price they can, so it’s rare to see these properties sell for “pennies on the dollar”.  Too bad for Tom Vu!

It’s always a good idea to get proper advice from experienced real estate professionals and lawyers, and to make sure whatever you home you purchase, that you have awareness of your risk and all of your options.  When in doubt, make sure you include a condition in any offer that allows your lawyer to review it.