A great article was posted in this month’s “Realtor Edge” about power of sale properties and homes being sold in “as is” condition.
It seems that the two go hand-in-hand, since properties under POS actually must be sold in as-is condition.
I can’t even imagine trying to cut through all the red tape when the bank has its hands on ma and pa’s home…
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 a 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 protection, 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 percent down, but if the markets change and interest rates increase dramatically, which happened in the late 1980’s and early 1990’s – 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 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’re getting a great deal, but Radomsky warns that a 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. No conditions can be placed on the offer, so buyers who want a home inspection can’t make their offer conditional upon a satisfactory inspection. For cases in which buyers want an inspection, they would need to arrange and pay for the inspection prior to making an offer.
I’ve only ever dealt with ONE power of sale, but it was a nightmare.
The property was owned by TD Bank, and they demanded seven business days to review the offer. I gave them 24 hours. They refused to look at the offer. So I got my broker involved and explained to them the legal ramifications of not presenting a registered offer. They didn’t care…
They returned our offer with a sign-back of full price, with fourteen pages of clauses and conditions.
But what bothered me the most was that most of the clauses and conditions had no bearing on this transaction!
They had clauses that said, “If this property is a condo…..” when in fact the property was a house.
They had clauses that said, “If this is property is a farm….” when it clearly wasn’t.
There were about a hundred more useless clauses, just like those.
We had to spend hours going through clauses that should never have been included, and the lawyers made a ton of money.
There was so much red tape involved that my buyer walked away.
That property was listed at $210,000 and four months after they signed our $198,000 offer back at $210,000, the property sold for $151,000.
I wish I had bought it myself! The property taxes were only $2,400 per year, and here we are, twenty-five months later and I think that piece of land is worth $280,000.
So I don’t know if I can agree with the section of the above article that read: “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.”
There’s just no way that property was only worth $151,000. The bank wanted out, and they got out in a hurry…