I recently came across an advertisement for a property for sale due to foreclosure. How does a foreclosure sale differ from a traditional purchase?

Property sales due to lender foreclosure are often also referred to as a distress bank sale, or sometimes confused with a power of sale. A foreclosure sale is a method available to lenders, banks and non-traditional lenders to cover the unpaid mortgage. In foreclosure proceedings the property is not being sold by the owner, rather it is the mortgage lender that has taken action to sell the property.

In the case of a property being sold due to foreclosure, the lender may become the owner of the property and in that case may retain any profit realized from its sale. Lenders have an interest in recovering the amounts owed to them under the terms of a mortgage.

A significant difference between a foreclosure sale and a traditional transaction is that a foreclosure sale is often negotiated between the buyer and a lender. This can result in a slower transaction, as negotiations will typically be conducted during standard business hours and may require several approvals for any changes relating to the agreement and its acceptance. Another difference is that foreclosure proceedings are conducted under court supervision under a process set out in the Rules of Civil Procedure.

There are a few common misconceptions associated with foreclosure properties, such as:

    • Buying a home in foreclosure is a good way to save money. While some foreclosed properties are priced below market value, there is no guarantee that you’ll save money in the long run. These properties can still be in demand, generate multiple bids and sometimes a purchase price that exceeds the asking price. Be sure to exercise your due diligence to learn about market value in the neighbourhood and of any additional fees, penalties or expenses that may impact the sale price.
    • All homes in foreclosure are in a state of disrepair or are fixer-uppers. This is not always the case. Regardless of the condition of the home for sale, it is important to know that the lender will not warrant its condition and will most likely be offering it in “as-is” condition. It’s a good idea to speak with your salesperson about home inspection considerations. Due to the ‘as is’ nature of these types of sales, some lenders won’t accept a home inspection condition in your offer, so if the property needs any repairs etc., you may have to do a pre-purchase inspection, or do your own information gathering to decide whether or not to move forward with the purchase.

I recommend seeking out a real estate salesperson and real estate lawyer experienced in foreclosure sale transactions to provide their expertise and counsel to ensure you fully understand the laws regulating power of sales and foreclosures and the nuances associated with these transactions before entering negotiations. It is important to have your real estate lawyer review all the transaction documents, as well as check the title for liens (etc.) so that the transaction will be as smooth as possible.

If you have a question for Joe about the home buying or selling process, please email information@reco.on.ca.

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.

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