By: Jayson Schwarz LLM
I cannot count the number of times people have asked me if I know how they can buy foreclosure property or power of sale deals. “You must have inside knowledge from that bank you act for” they say. My answer is always the same. Everything in life is worth what you pay for it. It is only rarely that one of these deals turns out to have a big upside: that is not to say that a careful, prudent and experienced purchaser cannot find a good investment and by the way we don’t have inside information.
To buy from a vendor under foreclosure or power of sale you need to first understand what this means and how the properties got there. Either the mortgage or the Mortgages Act provide the methods of dealing with default. When a mortgage goes into default the mortgagee (the lender) generally wants to realise his money as soon as possible.
Generally, the quickest method is to follow the procedure that allows the issue of a Notice of Sale Under Mortgage. This notice has to be sent to very specific people in a very specific manner. Then there is the issue of time periods. They are different depending on how the process originated. In all cases the mortgagor (the borrower) has time to pay the mortgage and costs current and “redeem” the property. Even that has inherent questions.
In a foreclosure action the sale can be pursuant to a foreclosure sale, or the mortgagee may have already completed the foreclosure of the property and now owns it and is selling as the owner, not pursuant to the mortgage, as on his taking ownership the mortgage was extinguished.
This all sounds confusing, does it not? Well, it is. There are huge pitfalls when buying property this way. Most of the time when purchasing distressed property everything is “As Is”; so any defects in the property, the taxes, the title, etc., are your responsibility. Lawyers have to spend extra time and conduct a lot more searches just to ensure you are getting a good and marketable title. Title insurance may not cover the situation or have so many exclusions as to be pointless. As an example here is a list of some power of sale questions:
- is the redemption period 35 or 45 days?
- is the default period 15 days or 3 months?
- who has been served with the Notice? have they served all the right people and were they served properly?
- there must be assurance that no steps were taken during the notice period or the sale will be void
- have reasonable precautions been taken to ensure market value has been realised?
- can the mortgagee give vacant possession?
- does the mortgagor have a right of redemption after the offer was accepted?
- do the conditions you need in the offer to satisfy yourself as to the nature of the property, etc. place your deal in jeopardy for redemption?
So there you have it, a never ending litany of things to watch out for and then of course there is the whole question of finding a lawyer familiar with the issues of purchasing subsequent to a mortgage default.
Now, this is not a lecture on not to buy distressed properties, rather it is simply an article on the fact that anything that looks to good to be true, probably is. In other words remember that famous Latin legal maxim “Caveat Emptor”, “Buyer Beware”. The purchase of distressed property can be rewarding from a financial position, provided that as a buyer, you are careful, prudent and surround yourself with professionals capable of assisting you in obtaining the property without traps of any kind. Good Luck!!!!