Is buying a “power of sale” property a good way to get a deal on a home?
Just so my readers are on the same page, I’d like to clarify what a “power of sale” is. Basically, if a homeowner defaults on their mortgage, the bank can take steps to sell the property to recover the money that’s owed to them.
It seems to be a common misconception that power of sale properties are sold at a “fire sale” discount. But, in reality the lender is required to take reasonable steps to get market value for the property.
It can still be worthwhile to buy a power of sale, but there are a few complications that you should be aware of.
First of all, the property is sold “as-is.” The lender won’t know whether the basement has a history of flooding or if there are other hidden defects in the home. In a normal transaction you can ask the seller detailed questions about the condition of the property, and you can request that they repair certain issues as part of the deal. But that’s not possible with a power of sale—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. In addition, when you make an offer on the property, you can make it conditional on your satisfaction with the results of the inspection. If the inspection uncovers a major issue, the clause may allow you to walk away from the deal.
The second issue involves the legal aspects of buying a power of sale home. If a tenant or the owner is still living in the property, that can be an additional challenge. A real estate lawyer can provide you with guidance on how to proceed. A legal review of the documentation from the bank is also a good idea, especially since the documents can be long and hard to interpret.
The third twist involves timelines. The bank has procedures they follow when they’re considering offers, and their staff typically only handle offers during business hours. As a result, the offer process may take longer than normal.
Finally, the bank may also include 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.
There are quite a few caveats to buying a power of sale home, but it can still be worthwhile. Understanding potential issues, and hiring the proper experts will go a long way.
If you have a question for Joe about the home buying or selling process, please email firstname.lastname@example.org.Joseph Richer is Registrar of the Real Estate Council of Ontario (RECO). He is in charge of the administration and enforcement of all rules that govern real estate professionals in Ontario. You can find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps.