What to know about buying a power-of-sale home
When a homeowner defaults on their home loan, a mortgage lender can opt to sell the property through a process called “power of sale.” If you are keen on buying a power-of-sale home, here are some things you should be aware of.
Don’t assume that you will get the property at a discounted price. People often have the misconception that they are guaranteed to get a deal on a power-of-sale home. However, this is not typically the case as the lender is obligated by law to get market value for the property, and they will try their best to get that.
If the home sells for more than what is owed to the lender and the expenses involved in selling it or to cover any liens, those funds are typically given to the original homeowner, who is the borrower of the defaulted mortgage loan.
The homeowner may be able to get their property back. The lender may include a clause in the agreement that gives the homeowner the “right to redemption.” This means that if the homeowner is able to bring the mortgage back into good standing prior to you closing on the home, the pending sale can be nullified, meaning cancelled. However, very few homeowners are able to come up with the money to bring the mortgage up to date.
The lender cannot guarantee the condition of the home. Homeowners who are in the process of losing their property may not feel inclined to take care of it or keep up with home maintenance and repairs.
Personal contents in the home, such as furniture and appliances are not part of the sale.
In a typical transaction, when you work with a seller as opposed to a lender, you can negotiate repairs as part of your transaction. But when you are buying a power-of-sale property, it is usually sold in “as-is” condition.
There are steps you can take to better protect yourself. For starters, I suggest that you get a home inspection. Your home inspector can identify any substantial problems, including underlying issues with the home’s major systems, such as heating, cooling, electrical and foundation. When you place an offer on the property, you can request that it be conditional on you being content with the results of the inspection. Even if you end up buying without an inspection, I encourage you to have the home inspected, to help avoid any surprises later.
Hire a real estate agent who is knowledgeable and has experience with power-of-sale transactions. They can provide strategic guidance, answer any questions you may have, and check if a “right-to-redemption” clause is included in the agreement.
Consult with a lawyer who is insured to practice real estate law. While I recommend this for all real estate transactions, it is even more critical in a power-of-sale transaction as there can be a variety of circumstances that lead to problems on closing, particularly if the current owners or tenants are still living at the property.
Your legal counsel can also perform a title search to identify other potential issues, including liens against the property, and can review all the fine print of the documentation that the lender will provide.
If you have a question for Joe about the home buying or selling process, please email firstname.lastname@example.org.
This column is for general information purposes only and is not meant as legal or professional advice on real estate transactions.
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.