Buying a Power of Sale
Homeowners in Ontario may consider buying a home that is under “Power of Sale” (known usually in America as a “Short Sale”). A Power of Sale may be due to a foreclosure on the property by the lender or a negotiated deal by the homeowner because they are “underwater” on their payments versus the amount owing on the mortgage.
What is a Power of Sale?
In Ontario when a homeowner/mortgage holder defaults on their payments the bank or lender then sells the home to recover the amount owed on the mortgage. The home is put up for sale, usually at or near market value. The expectation of the buyer to get a deal on the home is tempered with the obligation of the mortgage holder to get market value for the property.In a regular home sale you would deal with the seller and their representative. In a Power of Sale you deal directly with the lender, so you may have less negotiating power as far as the property is priced.
If the home sells for more than the outstanding amount of the mortgage, and there is money left over after all expenses and costs have been paid, the borrower may end up with a final equity payment form the lender.
If the home sells for less that the outstanding debt amount the lender takes the loss. As well, commissions and fees may be negotiated by the lender to lessen their losses on the sale of the property and recoup as much of the outstanding debt as possible.
What Are the Risks of Buying a Power of Sale Home?
When a mortgage holder takes over a property in a Power of Sale situation the home may not be evaluated or inspected by the debt holder. This can lead to instances of underlying problems with the home not being discovered until after the home purchase has been completed.
As a potential home buyer you can add conditions to your offer that include a home inspection (which you will have to pay for) that may reveal problems with the home. It’s better to enter into the negotiations knowing everything you can about the home which may even allow your real estate professional to negotiate a better price on your behalf.
It’s also possible that the lender allows for a “Right of Redemption” which means that while you are negotiating for the purchase of the Power of Sale home, the current owner can make up all or a portion of the payments owed cancelling the Power of Sale transaction. Your real estate agent should tell you if this clause is contained in the “Agreement of Purchase and Sale” so you can be prepared for the possibility of the deal being called off.
You should consult with a knowledgeable lawyer when considering a Power of Sale home purchase. There are a variety of circumstances that can cause issues with you taking possession of the home should the sale close, notably if the current owners or tenants are still living on the property.
Power of Sale homes can be in bad shape. If the owner couldn’t afford the payments it’s also possible they couldn’t afford any repairs or maintenance bills, this is why a home inspection is strongly recommended.
You should also have a title search completed so you can identify the true owners of the home and any other liens against the property. Both of these items can cause you considerable headaches after deal closing.
Power of Sale homes often receive multiple offers so you may be competing against other potential buyers. It’s important that you do your due diligence to be sure that you are getting the home in the condition and price that is acceptable to you. Your real estate agent can walk you through all of the possible outcomes and protect your interests.
No matter why you are considering a Power of Sale home, as an owner or investor, you need to be aware of all possibilities involved in the purchase transaction and future ownership of the property. A Realtor® that has experience with Power of Sale transactions is your best option to protect your investment.
RECO: What you need to know about buying a Power of Sale home in OntarioMoneySmartBlog: Risks of buying a home in foreclosure
This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.