Looking back at the history of Real Estate in Ontario, I remember a time when there were more homes being sold under power of sale than by happy homeowners. We had a boom in the late 1980’s that ended in 1989. From 1990 – 1991 the market values dropped about 30% which caused homes to be taken back and sold by banks. There were so many, that I knew agents who solely represented lenders and sold only properties under power of sale. We are not back to those desperate times; however, we are beginning to see power of sale properties coming to market. Currently there are 13 homes being sold locally under power of sale.

To understand what power of sale properties are, we need to look at why they happen and what opportunities and challenges they present.

A power of sale process is typically initiated when a homeowner stops paying their mortgage. When this happens there can be 2 different approaches a lender can take.

Foreclosure: this is a process of a lender seizing a property that is done by making application to a court and through a judicial process, the property is placed in the lenders name allowing them to sell the property. The process takes between 6 months to 2 years. With this process the lender is assuming all equity in the property.

Power of Sale: this is a process where a lender gives notice to a borrower that in 40 days, they are going to place the property for sale, and the lender makes the decisions on price and terms. The lender is only allowed to recover their loan, costs and delinquent payments with any excess equity being returned to the borrower.

There are several defaults that a lender can begin the process of a power of sale. When a borrower signs a mortgage document, they make several “covenants” or promises. They promise to pay their mortgage payments on time, pay property taxes and in the case of a condo, keep the condo maintenance fees up to date. Any default on these items can trigger a power of sale. (Several years ago, I sold a condo townhome on behalf of a management company for nonpayment of condo fees.)

Other than the timelines, the big difference between these two ways of a lender recovering their mortgage is how the equity is disbursed upon the sale of a property. With a foreclosure, the lender is entitled to all of the equity in the property, however, with a power of sale, once the mortgage, all fees and delinquent payments have been paid out, the balance of equity is returned to the borrower. Because the title of the property remains in the owner’s name, the owner can at any time before the property is sold and closed to “redeem.” This means if the owner can find a way of paying back the entire mortgage, fees and default payments they can remain in the home and the power of sale is terminated.

Knowing that a power of sale property is being sold on behalf of an owner, here are some of the problematic areas for a Buyer.

• The property is sold in “as-is” condition. There are no warranties or history that comes with the property. In the event there are patent or latent defects, (defects that are visible or hidden) the lender is not responsible for disclosure.
• The lender does not warrant that the property will be in the same condition on closing as it was when the Buyer toured the home. How this commonly applies, is when a home is being sold with chattels, such as appliances. The lender does not guarantee that any chattels viewed will be in the property on closing.
• If a Buyer purchases the property with a firm offer and the delinquent owner redeems, the Buyers offer is terminated.

I have sold properties where all the above challenges have happened. In fact, one power of sale home I sold the owners won a lottery about a week before we were set to close. They paid out the mortgage and fees and my Buyer was left with nowhere to go as their agreement was terminated.

When a lender places a home on the market under power of sale they are required to obtain market value for the property. This requirement sets guardrails so a lender cannot sell the property dramatically under market value to speed up recovering their mortgage. Most times a lender will list the property for the appraised value and do their best to find a Buyer willing to pay close to market value.

Homes being sold under power of sale are not distressed properties. This may come as a surprise to some Buyers who feel they will be sold at a massive discount.

If you are considering purchasing a home under power of sale it is best to consult with a lawyer and have them review the special documents that the lender requires you to sign to purchase the property. In many cases, Buyers feel that there is too much risk with a power of sale and that there are better deals in the open market with Sellers selling homes offering warranties and a history of what is being purchased.

If you are considering buying or selling a home in Durham Region, I can be reached at lindsay@buyselllove.ca or 905-743-5555.

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