If you think you are getting a good deal when you purchase a power of sale, think again. Buying a property under "Power of Sale" in the GTA may end up costing you more than a resale. This article was posted in Realtor Edge in February, 2011 and is worth reading…especially if you are contemplating purchasing a power of sale.
First you see that the lawn has not been cut and the weeds are taking over. Then you notice that the newspapers and mail are piling up on the front porch. The windows look dirty, and the house looks forlorn and neglected.
These are possible signs that a house may have come under power of sale - but don’t be fooled. Even properties that look majestic and pristine, including homes in high-end neighbourhoods, can be subject to a power of sale.
A power of sale is a forced sale of a property by a mortgagee (a bank, financial institution or other lender) due to a default of one or more obligations by the mortgagor (owner or borrower) under the mortgage. The obligations include: paying principal and interest, paying municipal realty taxes, providing adequate insurance on the buildings, and keeping the property in good repair. When a mortgage goes into default, lenders have several options, and power of sale is just one of the legal remedies.
"There’s a story behind every power of sale, and in many cases it’s a sad one," says Lou Radomsky, an instructor and lawyer who has taught for the OREA Real Estate College since 1989.
"For investors or lawyers, real estate is a piece of paper or a business proposition, and in a number of instances, if it doesn’t work out, the investors walk away," says Radomsky. "But owners have an entirely different relationship with the property. Power of sale is very personal to them."
In some cases, people have put only five per cent down, but if the markets change and interest rates increase dramatically, which happened in the late 1980s and early 1990s - or if the owners lose their jobs or fall into deep debt - then they can’t carry the payments. It can happen with high-end properties too, he notes.
Radomsky deals with some 20 to 30 power of sale situations each year, he estimates. "My heart goes out to the individual in that situation, but there is another side to it as well," he says. "The lender has put out money, and their money is at risk of being lost. Even though the lender is probably in a better financial position than the buyer, it’s still a loss, and that has implications too."
Condominiums represent a large number of power of sale situations for Radomsky’s firm. Some buyers have a high-ratio mortgage or own several units and are barely able to make the mortgage payments, so they fail to pay the condominium maintenance fees. "The owners may already be fairly stretched, so they’ll pay the mortgage but not the condo fees, and that can lead to power of sale as well."
When the economy moves into a recession, the number of power of sale situations tends to increase, he says, especially when jobs are scarce. In tough times, a disproportionately high number of home listings can be power of sale, he says, particularly in towns with one or two key industries hard hit by recession or company closings.
The condition of some power of sale homes can be very poor, he notes. In some cases, homeowners vandalize their own properties before vacating out of anger at their financial circumstances or other parties. He recalls one instance when the owners created a large hole in the second-storey bathroom floor that went right through the ceiling of the main-level bathroom, among other damages.
A power of sale can in fact end up costing much more than a resale, he says. Buyers who seek a power of sale situation may think they’ll get a great deal, but Radomsky warns that power of sale is not always an attractive proposition. "Many people have misconceptions about the value of a power of sale home," he says. "It’s not always a good deal. Some people see it as an opportunity to take advantage of someone else’s misfortune, but fortunately, the courts hold the lenders to a higher standard, requiring them to get a fair price, and in fact the best price, for the property."
The "as is" condition of a power of sale is crucial and can be an eye-opener for many buyers. The buyer purchases the property, fixtures and chattels "as is"; and the buyer agrees that the mortgagee does not accept any liability for the condition of the property. For all of these reasons, home inspection and property insurance conditions are essential, as are searches for outstanding work orders or deficiency notices. While some lenders/sellers may permit conditions in power of sale offers, others may ask that offers be unconditional. In those cases, buyers may need to arrange for the inspection prior to making an offer as well as consulting with their insurers ahead of time. When in doubt, check with the lender/seller. Although sellers generally must disclose known latent defects that render a premise dangerous or unfit for habitation as an exception to "buyer beware" principle, even those types of defects are not likely to be known to the mortgagee selling under power of sale.