"Power of Sale” is it a Bargain or Risk?
Tags: Property, Market, Mortgage, Inspector, Contractor
There seems to be a misconception that a “Power of Sale” is sold at a discount price.
Whenever there is default in mortgage payments, the lender has the right to recover and safeguard their interest. Both lender and property owners have to follow the Ontario Mortgage Act to protect themselves under the privileges available for both of them.
I’ve been asked to find bank sales, but in Canada the banks are legally obligated to sell the properties for FAIR MARKET VALUE. The property will have undergone an appraisal by a qualified, accredited professional.
If there is any surplus after the property is sold, then the lender must account to the borrower(s), and other subsequent encumbrancers. The Mortgage Act requires that the proceeds of the sale be applied in a specific order:
• First be applied to the cost of conducting the sale • Then to interest and cost owing under the mortgage • Then to the principal money owing under the mortgage • Next to pay any amounts due to subsequent encumbrancers • Then to pay tenants’ security deposits
· Finally to the homeowner
Typically there is a “right of redemption clause” that lets them call off the deal if the owner catches up on their mortgage payments before the sale closes. This rarely happens in practice, but it’s a good idea to find out if they will include the clause in the Agreement of Purchase and Sale.
Also, keep in mind that the banks will typically take longer to respond to any offers due to their particular processes and office hours.
The property is sold “as-is” meaning no disclosures or warranties. The offer to purchase will be with the lender not the homeowner. Therefore, you won’t know whether the basement has a history of flooding or if the appliances, or even the furnace will be working on closing. Plus, there could be other hidden defects such as mold in the home. Any repairs will be YOUR responsibility after you complete the purchase.
With that in mind, a thorough inspection of the property is highly recommended. A home inspector, contractor, environmental consultant or structural engineer can identify underlying problems with the home’s major systems, like heating and cooling, electrical, foundation, and so on. You need to include the costs for these extra services or decide if you want to take the risk.
There are quite a few caveats to buying a power of sale home. Understanding potential issues and hiring the proper experts can save you money and headaches in the long run.
Strongly recommend that a real estate lawyer should review the documentation from the lender, especially since the documents can be long and hard to interpret.
Remember each transaction is UNIQUE, so be careful, the last thing you want is to lock yourself into a deal without knowing all of the facts!
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