December 20, 2013
by Tim Janzen
Have you ever been tempted by the thought of buying a property at a ridiculously low price from an owner who is in default on their mortgage, so you can fix it up and then sell it later for a profit?
When an owner is in default on their mortgage, the lender will start foreclosure proceedings. This will usually result in the court granting the lender conduct of sale. These sales, while tempting, can sometimes cost more than you expected they would.
Is the owner willing?
Sales done by way of a conduct of sale order are different than those negotiated between a willing seller and buyer. The key word here is “willing” ‒ often the property owner is not cooperative, and that can cause all sorts of problems.
For example, will the owner actually move out when they are supposed to? The court order should give you vacant possession, but the process to enforce that order is not cheap or quick, and you may find yourself homeless while that process is underway.
The costs for these problems is yours, and you have little or no control over what they will amount to.
What condition is the property in?
You will buy the property on an as is, where is basis.
In most cases, you will not be able to do any research, investigations or inspections on the property to determine exactly how bad the current state of affairs is. If you buy the property and it turns out to have massive mold damage, unseen termite problems, or a crumbling foundation, you will have absolutely NO recourse against the owner.
As well, the owner may cause considerable damage to the property on their way out, or leave all kinds of debris or garbage that you did not anticipate having to deal with ‒ you may be having to hire cleaning or repair crews, or storing the old owner’s things (at your cost) before you can move in.
How do you tell what the property is worth?
Just because the property is in foreclosure doesn’t mean you will get it at a “sale” price. The bank has to try and get the best possible price in the sale, and the court will reject any unreasonable offers; don’t expect to get a steeply discounted price just because the property is in foreclosure.
Sometimes it’s not easy to tell what a reasonable offer might be. If the owner refuses to let any REALTORS® or appraisers into the property, then they can only do an assessment or appraisal based on the outside of the property ‒ this can lead to completely inaccurate valuations if the inside of the property is in terrible shape.
Be very careful to understand how the property’s listing price has been determined, and whether anyone has been able to get an inside evaluation done. You don’t want to find that you need to pay for substantial repairs over and above the purchase price before you can move in.
Is there a chance the owner could stop the foreclosure?
Until the court issues its vesting order (naming you as the new owner), the old owner can rectify the defaulted mortgage or refinance with another lender. If that happens, then the mortgage is no longer in default (or it is paid out completely and a new mortgage is put on in its place), and the foreclosure proceedings stop. You will lose the time, effort and any money you have spent in attempting to obtain the property.
Are there other bills that need to be paid?
If an owner is in financial trouble, it’s entirely possible that their mortgage isn’t the only payment they’ve gotten behind on. When you take ownership of the property, will you have to deal with other claims for things like unpaid personal or business taxes, or spousal claims? It might be a nuisance to have to keep telling the old owner’s creditors to go away.
Is the property taxable?
There are several kinds of taxes that need to be considered when you buy property. Usually the seller gives you the information you need about whether the property is taxable or not. In foreclosures, uncooperative (or missing) owners might make it impossible for you to get the information you need, and the lender has no ability to give you any information about the taxable status of the property. Your purchase of the property could be taxable, even if no one tells you it is. You could be going in blind.
For example, the Income Tax Act requires buyers to determine if the owner is a non-resident. If the owner is a non-resident, you could find yourself having to withhold some of the purchase money (potentially up to 50% of the property’s value) for non-residency taxes.
You may also find yourself paying GST on the property, even years after it has been transferred into your name.
Getting the court order right
All offers have to be approved by the court. There could be multiple offers made on the same property. Conditions are generally not allowed by the court, so you have to have your financing securely in place prior to making the offer (not just approved, but actually fundable).
If your offer is approved by the court, you must make sure that the court order contains the right price, dates, the full and correct legal names of all buyers, the way in which the property is to be owned (sole ownership? joint tenancy? tenants in common?), and that it clearly sets out how the net sales proceeds are to be distributed. Review the draft court order very carefully before it is finalized.
What will your closing and legal costs be?
Foreclosures generally mean increased legal and closing costs. Some lenders will require you to take extra steps or provide extra security before they will agree to a mortgage. Some lenders will not finance a foreclosure property at all. Some insurance packages will be more expensive because you simply don’t know what condition the property will be in.
As well, your notary may need to negotiate with the lawyer for the owner (or their bank) if there are issues with the terms of the court order. In some cases, buyers have had to go back to court to get a court order rectified. You should expect to pay more for foreclosure proceedings than a traditional purchase.
Contact us if you are considering buying a foreclosure property.Visit our website for contact information.