Considering purchasing a foreclosure? I can tell you from personal experience there are some major misconceptions in purchasing a property that is being foreclosed on and let me tell you it is not for the faint of heart! Thanks to popular house flipping shows seen on TV, purchasing a foreclosure seems to be as easy as purchasing any other property just at a lower price which is NOT the case, especially in Canada. Here are a few key differences you need to know about the foreclosure process before considering purchasing one of these properties.
A property that is being foreclosed on means the borrower/ home owner has defaulted on paying their mortgage. A foreclosure will most likely be listed as a “court ordered sale” as the courts have “ordered” the sale of the property and have given the rights to list the property to the bank/ mortgage holder. From there the bank will hire a Real Estate agent to list the property, arrange all showings and manage the transaction of the property. Generally speaking the bank and real estate agent are working together to obtain true market value for the property.
Once the real estate agent receives an offer and the bank has agreed on price and terms of the offer the buyer will have the opportunity to satisfy all of the subjects set out in their contract (ie, home inspection, financing and appraisal). Along with the standard Contract of Purchase and Sale, all offers must be accompanied with the “Schedule A” that is drawn up by the Bank. The Schedule A dramatically changes the contract and warranties that are in it such as, all the appliances will be in working order at the time of possession. Once all subjects have been satisfied the accepted price becomes public knowledge to further potential buyers and is posted on the listing and a court date is set.
On the day of court, any interested buyer can show up to place an offer on the property. If the original buyer decides to change their offer amount based off how many other interested parties show up they may do so and re-submit their offer in a sealed envelope. It is important for interested buyers to show up at court prepared with an extra sealed envelope in case last minute changes are needed to be made to the offer. All interested parties will sit together in court until the subject property is called and the appointed judge will ask the lawyer acting for the bank collect all sealed offers and bring them forward. The bank must be able to prove to the court that the sale of the property is based on fair market value, and that the property has been adequately marketed by the real estate broker. The judge will then open all offers and have the final decision in who has the best offer to “win” the property. From the sale of the property, the bank will receive what is owed on the mortgage and the home owner will receive the remainder (if any) of the proceeds. Even though the bank has been given the rights to the property, the seller still has the right of redemption. This means the home owner is given the opportunity to pay off all debts owed. In my personal experience, the home owner fought hard to pay off all debts right until the property went to court (which in total was over a year). The home owner pleaded his case in court that only a couple of more days were needed to get the money into the correct accounts and the judge granted him this time. A new court date was set and all the potential buyers that showed up in court to bid on the property were asked to come back to the new court date. Unfortunately the home owner he was unable to come up with the money and I was awarded the property, however, it is clear that the person being foreclosed on is given every opportunity to redeem their right to the house right until the very end.
If the selected offer is not the original purchasers offer, the “winner” is NOT given the opportunity to obtain a home inspection, ensure financing is approved or satisfy any of the conditions the original offer was given unless this was done prior to attending court with the understanding that they may not “win” the property. It is extremely important for all purchasers interested in placing an offer in court to ensure their finances have been approved prior to attending court as the judge will usually determine the date of completion and possession and once the “winning” purchaser is called there is no turning back. This means finances cannot be tied up in the equity of another property and a buyer needs to be ready and willing to complete on the sale at any given time (could be two weeks from the court date).
When the time finally comes for the new home owner to take possession, it is important to remember, the property is being purchased “as is, where is”. Meaning the property can be left in any condition and will have no guarantee from the bank that it will be in a clean and tidy manner or that all the appliances will still be there. Since the previous owner no longer owns the rights to the property, a lot of the time they will take as much as they can out of it and will not leave it in very great condition. I have heard of many foreclosure horror stories, one where the previous owner removed all of the copper wiring from inside the walls leaving the new owner a huge mess of drywall to clean up and an extensive bill to re-do all of the electrical. Thankfully that would be considered worst case scenario and not all foreclosures end up in that state of disarray. Luckily, on my foreclosure possession day I walked in to an immaculately clean home however I would be lying if I said I didn’t have nightmares as to the potential disaster I might be walking in to. As you can see, purchasing a foreclosure is not for the faint of heart and can be quite a risky decision as a buyer which requires the guidance of an experienced real estate agent to help you navigate through. Before purchasing a foreclosure you will need to decide if this is the best decision for you as there are a lot of factors to consider and is not always the best “deal” out there. I highly recommend speaking with a real estate professional whom is experienced in foreclosures when considering purchasing one.