I've often been asked to look for Power of Sale homes for purchase and thought I should look up some articles on this and came up with one from the Toronto Star dated December 10, 2016, written by Joe Richer, the Registrar of the Real Estate Council of Ontario (RECO). I've summarized the article below.
First of all, what is a Power of Sale and is it a good idea to consider such a purchase?
Basically, a Power of Sale takes place when a homeowner defaults on mortgage payments. The bank/lender then takes steps to sell the property and recover the money that's owed to them.
It seems to be a common misconception that Power of Sale properties are sold at a discount. In reality, the lender is required to take reasonable steps to get market value for the property, take the money owed to them after deducting all that they've paid for like taxes, agents' commissions, etc. and return the balance, if any, to the original owners. Having said that, it can still be worthwhile considering such a purchase. However, there are a few complications that one should be aware of.
First of all, the property is sold "as is". The seller/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 then request that they repair certain issues as part of the deal. That is not possible with a power of sale - any repairs will be your responsibility after you complete the purchase.
With that in mind, a thorough conditional inspection of the property is highly necessary. 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. That way, you can back out of, or re-negotiate, the deal if required.
Also, I've come across such homes that have been totally damaged by the defaulting owners, prior to vacating the property. Wires have been pulled out, doors and walls have been damaged, carpets badly stained, and the list goes on.
The second issue involves the legal aspects of buying such properties. If a tenant, or the owner, still lives in the home, 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/lender 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 defaulting 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 such a clause is included in the Agreement of Purchase and Sale.
In short, while there are a few caveats to buying a power of sale home, it can still be worthwhile. Understanding the potential issues and hiring the proper experts will go a long way.