So you are interested in foreclosures....
With current economic conditions and future uncertainty the topic of foreclosures has been coming up more often in discussions I am having with clients.
While an unfortunate circumstance for some they can offer a unique opportunity to certain types of buyers.
Lets dive into some common questions surrounding foreclosures to see if it could be for you.
1. What is the difference between "In Foreclosure sale" and "Post Foreclosure Sale"
With an"In Foreclosure sale" the lender (bank) has made an application to the court through a statement of claim and foreclosure proceedings have started. The seller of the property is the judicial system, in Alberta this is the Court of Queen's Bench. The borrower (current owner) can still reside in the property and they have the right of redemption. This means that up until the final order is granted by the court the borrower can end the foreclosure process by paying what they owe and bringing the mortgage up to date. When offers are received they are then presented to the judge. The judge decides if one of the offers is acceptable, usually the one that is highest in value, fastest possession date and with least number of conditions. The sale proceeds are used to pay back all debts on title along with legal fees and other fees. If anything is left over it goes back to the borrower.
A "Post Foreclosure sale" occurs when the bank or insurance company (ex: Canadian Mortgage and Housing Corporation) takes control of the property. Usually this occurs when the court has been unable to sell the property and the lender is transferred the property in lieu of the debt they are owed. At this point the property is almost always vacant. The bank has more control over what offers they will accept.
Your Real Estate Agent will be able to tell if it is a in foreclosure sale versus a post foreclosure sale by what is registered on title and also by who is shown as the seller of the property.
2. Will the property be in the same state on possession day as when I viewed it?
This is one of the risks associated with the purchase of a foreclosure property. The property is sold "as is, where is, on possession." This means that those nice stainless steel appliances that were there when you viewed the property might be removed or damaged when you take possession of the house. There could be other damage to the house since you last viewed it as well. The risk is much lower in a post foreclosure sale because the owners and tenants have moved out of the house and are no longer in possession of the property. It is unlikely they will come back to take anything, but again no guarantees. In an in foreclosure sale the borrowers or their tenants are still residing on the property they could take appliances or light fixtures with them or damage the property before they leave.
You are paying a discount to acquire the property so one of the trade offs is the risk associated with unknowns on possession day.
3. Is the purchase contract the same for foreclosure properties?
Yes and no. In an in foreclosure sale there is usually a special purchase contract provided by the court of Queens bench which is quite different than the purchase contract provided by the Alberta Real Estate Association. In a post foreclosure sale the Alberta Real Estate Contract can be utilized but many, if not all of the warranties and representations contained within this contract are excluded and crossed out. Usually a "Schedule A" will accompany the standard purchase contract. This is a separate schedule that details what the lender will provide and what they will not for the Real Estate transaction. Almost always they will not provide things such as: Real Property Reports, Condominium Documents, statements or declarations regarding permits, compliance, defects and more. It is wise to seek legal advice so you understand what you are agreeing to before signing the contract.
Regardless of whether the property is in foreclosure or post foreclosure the bank and court structure the purchase contract in such a way that they are not responsible for the state of the building you are purchasing and "buyer beware is applied" to these types of properties.
4. I made an offer on a foreclosure yesterday but I have not heard back yet, why not?
Things move much more slowly in a foreclosure sale. Normally you have a seller who is eager to sell and a buyer is who is eager to buy but in a foreclosure you are buying from the court or the bank and it takes more time.
With an in foreclosure sale the Court of Queens bench operates as the seller and it usually takes 2-3 weeks to set a court date and have it heard to have an offer accepted or declined. If there are conditions on the offer such as financing or property inspection then court is usually set for a date after conditions are waived. The judge will be extremely hesitant to approve a contract with conditions still waiting to be waived.
The best offer to present to court is one that is unconditional. If you can't write an unconditional offer the next best thing is to write the offer, submit it and then start the process of approving the conditions prior to the court date. The court only gets one offer, there could be 3-4 offers on a property and the lender with their lawyer will decide which offer will go to court. Usually it is the highest offer with least or no conditions. However, if the offer is too low the lender can still object to it in court.
With a post foreclosure sale the bank or mortgage insurance company is the seller and at this stage there is more opportunity for buyers to include conditions on the contract such as financing and property inspection. One reason is that there is more ability for access to the property by appraisers, property inspectors, etc.
5. So after all this is a foreclosure worth it? Can I get a deal?
For some buyers a foreclosure is absolutely worth it. If you are knowledgeable about Real Estate, construction and housing in general then foreclosures can offer a good chance to purchase a property and renovate it for resale or rental purposes. For these types of buyers it is not a huge deal if they discover asbestos in the attic or an issue with the foundation as they have the tools and resources to deal with it.
The foreclosure market in Canada, specifically Alberta, is quite a bit different then in the USA. In the States if someone is in default on their mortgage they can give them 48 hours to leave the residence and the bank takes over the property and sells it for whatever they want. From what I understand they do not have a judicial process or at least one that is similar to Canada. In the USA the foreclosures seem to sell for quite a bit less than market value then they do in Canada.
The discounts on foreclosures in Canada vary and you have to examine the price you would pay for the property along with the amount of money potentially needed to invest in repairs or updates to see if it is a good purchase or not.
Contact me for more information about foreclosures
If you are interested in foreclosures I would be happy to discuss with you and show you options. I can set up a search of new foreclosures that can be e-mailed to you weekly or daily.
About the author: Peter M Leveille is a licensed real estate agent and Seniors Real Estate Specialist (SRES) in Edmonton, Alberta, Canada. He has been selling real estate for 15 years and is the Broker and Owner of AB Realty LTD.