There is a misconception among home buying and selling consumers as well with many Realtors across the country in regards to what a power of sale real estate transaction is and how they are completed. A power of sale listing is being sold by the bank, not the homeowner. Some people misconstrue a power of sale with a short sale as that term has been floated around regularly as the media has reported about the housing crisis in the United States.
A “short sale” is very rare in Canada, this why you won’t see a property being promoted as such unless the homeowner agrees to a short sale with the lender. Tier one banks would not agree to a short sale, they prefer the power of sale route as they are governed by the Canada Mortgage and Housing Act whereas a private lender may not be governed depending on the particular situation.
When any type of real estate is being by power of sale in Canada, the subject property is being marketed at true market value while being listed on MLS with a top Realtor. The home owner does not have a say in which Realtor is retained or in how the value is appraised. Having said that, the bank does tender out three appraisals from different appraisers while also receiving different appraisal amounts from three or four local Realtors where the subject property is located. The bank is careful and thoughtful when it enacts its right to sell a property that its mortgage is in default.
Foreclosure vs Power of Sale
It’s important that both consumers and even Realtors understand the fundamental differences between a foreclosure and power of sale. They are nothing alike yet most interpret them to be the same.
When a bank enforces a power of sale the mortgagor (owner) still has the right to the equity (if any) and is also liable to pay all costs involved that the lender (mortgagee) assumes throughout the process.
A foreclosure, however, the lender assumes full control over the property by removing the homeowner from the title. The lender can then sell the property for whatever value it wants, it does not have to respect any payout equity, it can keep all the proceeds while also being liable to assume all costs involved.
In essence, a lender can sell the property well below true market value if they choose to in order to only recoup the outstanding remaining balance on the mortgage when a property is sold under foreclosure.
Power of Sale
- The mortgagor remains on title until the sale but the property is usually vacated
- The property is sold by a credible Realtor
- The mortgagor must pay all expenses and losses incurred by the bank
- The mortgagor is entitled to any extra funds from the proceeds after the balance of the mortgage is paid and expenses
- The mortgagee takes over full control of the property by removing the homeowner from the property title
- The property is sold at an auction, usually by the bailiff or courts
- The mortgagor is no longer responsible for any costs incurred by the lender
- The lender (mortgagee) is entitled to keep all funds from the sale proceeds and is not obligated to pay any equity back to the mortgagor
Is there Value in Buying a Power of Sale Listing?
I have acted on behalf of both the bank and the home buyer. I have listed hundreds of power of sale properties as most were promoted as MLS listings in Burnaby as most homes sold by a lender are common in big urban cities. The one thing that stood out most in my experience is that these properties were poorly maintained. There are some other downsides to when buying a power of sale. The “as is” clause that a bank requires the buyer to accept, meaning the bank will not offer any warranty to the state of the property on completion, nor will they offer any warranty if chattels are missing or no longer present at the time of completion. A buyer is basically buying sight unseen which can be dangerous. Having said that a homebuyer could perform his/her own due diligence if negotiated in the offer to purchase.
The other two main issues when buying a power of sale is the home owners right to redeem even if the property has been sold, this right does not expire until the new buyer closes the transaction.
The Right of Redemption
Other than having to accept the “as is where is” clause that a lender requires in any agreement from a purchase when negating a power of sale, the other main issue is the homeowners right of redemption. The mortgage and housing act specifically says that the homeowner can redeem the property right up until the day of closing if the home was sold to a new buyer. If the homeowner is able to pay all the costs that the lender has taken on plus pay out the mortgage amount then they have to take the property back from the bank in which leaves the buyer with a null and void agreement of purchase.
Some lending institutions don’t even require the mortgage amount be paid in full for the right of redemption to kick in, all they require is that the owner pays all costs incurred and bring the marriage in good standing.
Please note, in all the power of sale transactions that I've been involved in, I have only seen this happen once and may never experience this again, it’s rare that the homeowner comes up with the money especially if the property has been poorly maintained and requires major work to bring back unto par.
Complete the Deal Quickly
In order to protect a buyer interested in purchasing a power of sale, it’s essential they close and complete the transition quickly. Completing the transaction quickly limits the amount of time the owner has to come up with the money in order to redeem the property back.
As I said above, the one time I experienced an owner redeeming the property back was in 2012, I was acting for the bank, I listed the property, we negotiated a deal with a buyer through their buyer agent in good will. These buyers had already sold their home, they had no place to go, they insisted on a 90 day closing as they didn’t want to pay for a bridge loan in which amounted to no more than $250.00 to close in 30 days. They opted to close on their home on the same day as the new one (the power of sale property) The day prior to closing the buyer's lawyer received a letter from the bank stating that the homeowner has redeemed the property and that their clients' agreement of purchase and sale was now null and void. They were forced to complete the closing for their home with no place to go.
Again, if you’re a buyer looking at a power of sale, complete the transaction as quickly as you can!
If you’re a homeowner that is struggling to keep its mortgage in good standing, call your lender and work out a better payment structure to catch up on any past-due payments. Never let your mortgage fall past due to the point of no return in which a lender would have no choice and begin the power of sale process. If it does get close to the point of no return, start planning to sell the home yourself quickly through a Realtor. Instruct your real estate agent to promote the home on MLS as well as other marketing techniques, selling a home quickly is achievable in the worst market conditions, the key is to be pro-active while also retaining the services of a top Realtor.
If you’re a home buyer that is interested in buying a power of sale type of property, make sure that you conduct due diligence prior to even offering on any said property and retain the services of a quality buyer agent that is fluid in how a power of sale transaction is completed.