Foreclosures are bad news for banks and delinquent homeowners, but they can offer the best real estate deals in town for the rest of us.
There are two main ways in Canada that a lender can recover a mortgage debt when a borrower defaults:
Houses, condominiums, and vacant lots can all be purchased after a foreclosure for 10 per cent to 15 per cent below the market value of comparable properties.This can mean a lower down payment, a smaller mortgage and lower monthly payments. The problem is, well-informed investors often snap up the premium deals before the general public knows about them. But you can compete if you know what you’re looking for.
Before you start your hunt for a bargain, be sure that you are prepared to invest the time and money to add value to the property.
A distressed, or foreclosure sale, results when the borrower defaults on his or her mortgage payments. The sale of the property is to satisfy the payment of the loan.
Getting to know real estate agents in the area that you are interested in can help you find out how to buy foreclosed homes. They can tell you when they are coming up for auction. Often people do not know they are on offer until it is too late.
Often the government will have mass sales where they have a group of houses that they want to sell off cheaply. Once again keep your eyes and ears open and call on your real estate agent for any upcoming auctions.
To start, there are two options that the court can take in foreclosure proceedings (see right-hand box).
The steps to buying a foreclosure vary depending on the province, so there may be small differences in how the sale of a distressed property proceeds. For example, in Ontario the lender can list and sell without court approval, while in Quebec the lender must first take title.
Generally, however, purchasing a foreclosure involves the following eight steps:
1.The lender/mortgagee applies to the court to sell the property where the borrower has defaulted on payments.
2.A court order is given to the mortgagee to sell the property.
3.The mortgagee can list the property with a local Realtor.
4.The court must approve the purchase price and the terms of the sale.
5.The purchaser makes an offer that is first accepted by the mortgagee.
6.An application is made to the court to present a no-subject offer (all financing, inspection, review and other conditions have been approved).
7.The court then either accepts or rejects the offer.
8.The court ratifies the offer that day and completion and possession dates are confirmed.
The difference between purchasing a foreclosure property and a regular property is that with foreclosure, a no-subject offer must be presented to the court for approval. In a regular sale, which usually has subjects, an offer is presented to the owner/vendor of the property. In most cases an offer presented to a regular vendor is countered and the negotiation between the buyer and the seller can often be a tedious and cumbersome process.
With a little foresight and work, you can beat the pack and wind up with a good deal on a long-term investment or second home. Once you find a property, you may want to check with your financial adviser to make sure it’s a worthwhile investment and fits in with your long-range financial strategy.