I’ll tell you which call I have not received in quite some time: the good, ‘ole, “power of sale” seeker.
You know the guy?
The neighbourhood genius who’s looking for a “distressed property” or wants to buy a “foreclosure,” maybe at “auction,” or maybe through “power of sale.”
I used to get these calls a lot and they always amused me.
Let’s typecast for a moment. Picture a 21-year-old who just finished business school and read a couple of books on real estate, none of which have anything to do with the Toronto market. One of these books says that it’s a “good idea” to look for properties that have been foreclosed on and can be bought for 50% of fair market value. Then, with a coat of paint and a new mailbox, they can be “flipped” for BIG BUCKS!
People used to call me and say, “Hello, I’d like to buy distressed properties at auction.”
Or they’d say, “I’m looking to get into a foreclosure for well below fair market value?”
I would always ask, “You mean in Toronto, right? Not Rockford, Illinois? Not Valdosta, Georgia?”
Tell me you’re a market bear and that you think the Toronto real estate market is on the downswing, but don’t tell me that we’re in a city where properties can be “stolen” for “pennies on the dollar.”
The funny thing is, most of these guys had no money! Their next question would usually be, “And do you have any existing clients that are looking for passive investments?”
Every one of these calls ended the same way: with the young know-it-alls telling me they would “look around” and refusing to accept that they can’t buy a bungalow in Leaside for half of its value, just because it’s in poor shape.
As I said, I haven’t received one of those calls in a long time. But I am getting a lot more of the good ‘ole, “I want to sell my condo assignment,” where the caller/investor/assignor doesn’t have money for the next deposit installment…
Now, let’s say that you do want to purchase a property sold via power of sale.
Do you have any idea what you’re getting yourself into?
A power of sale can come in many different shapes and sizes.
This could be a house that’s completely dilapidated, with no running water, no electricity, and with a disclaimer that says, “Bring a flashlight, wear a hardhat, and walk the property at your own risk.” Or, this could be a standard one-bed, one-bath condo in a downtown tower.
There’s a common misconception that all power of sales are for run-down properties, but they’re not. A “power of sale” is simply a forced sale process because the owner defaulted on the mortgage, and the bank wants to get their money out.
There are a few agents in Toronto that specialize in power of sales, and we see their names pop up on the listings time and time again.
But the one thing I will say about power of sales at the very onset, is this, you’re not negotiating here.
In fact, almost all power of sales come with a pre-formatted Agreement of Purchase & Sale, uploaded to the MLS listing, that any buyer and buyer agent is expected to use.
Don’t like it?
No problem. The agent just won’t present your offer, nor will the bank consider it.
Do you know how about 99% of the standard Agreement of Purchase & Sale is “boiler plate” text that nobody ever alters? Yeah, well when it comes to power of sales, they mark all that up! Cross out entire sections that you’ve probably never read.
But in my mind, it’s the actual clauses in the Schedules to the Agreements that are problematic for a buyer, and while I understand why the bank/seller/agent includes them, I would be very, very weary if I were the buyer.
Let’s go through a few standard clauses and examine the risks therein..
The description of the Property is believed to be correct, but if any misstatement, error or omission is found in the particulars thereof, the Buyer shall not be entitled to any abatement of the purchase price or to termination of this Agreement.
This is just a straight-up indemnification clause.
Anything that’s wrong with the listing, too bad, so sad!
If the listing says the property is 50 x 150 but it turns out it’s 46 x 150, then the buyer has zero recourse.
If there are rental agreements for the hot water tank, furnace, and air conditioner, running $250 per month, that are not disclosed by the seller, then too bad!
In fact, anything that you can dream up that can be wrong in a listing is simply to be accepted by the buyer.
It’s the buyer’s job to perform due diligence on everything, and this can be problematic because some aspects of the home simply can’t be verified. The buyer is expected to take a leap of faith; one that I would certainly never take.
This agreement is made without representation, warranty or condition with respect to the fitness for any purpose, condition, quality or quantity, zoning or lawful use of the property. The Buyer acknowledges it has relied entirely on its own investigations and inspections. The Buyer will accept the property “as is” on the day of closing without regard for its state of repair, location of structures, walls, retaining walls or fences (freestanding or otherwise) and subject to all judicial, municipal or any other governmental by-laws, agreements, restrictions or orders effecting or regarding its condition or use (including deficiency, compliance requests, work and other orders), all registered or unregistered restrictions, agreements, rights of way, easements, covenants which run with the land or minor encroachments by buildings or fences on the subject property or adjoining properties or streets, all municipal and other development and sewer levies, fees, imposts and charges and all amounts added to the tax roll (other than realty taxes imposed on the assessment of the property and public utilities which are a lien prior to the Mortgage), in all cases regardless of whether there is compliance.
This is another indemnification clause, but this takes things to the next level!
No representation or warranty for anything.
And not just with the physical property, like whether there are broken clay pipes under the foundation, or whether there are dead squirrels buried in the front yard, but rather with any issues pertaining to legal use, open permits or work orders, undisclosed easements or rights-of-way, etc. These are serious, major implications that could completely alter a buyer’s ability or desire to purchase.
Again, the onus is on the buyer to perform due diligence.
But if the property has three stop work orders registered, the seller is under no obligation to disclose it. If there are monies owed to the municipality or province, the seller doesn’t need to say anything. If there’s a garage with a concrete slab that’s built 12-inches over the lot line and the next-door neighbour is litigating, the seller doesn’t have to disclose.
This is madness.
The Seller makes no representation whatsoever as to whether the property has been insulated with urea formaldehyde foam insulation or whether the property contains any other substances which may be hazardous or toxic or toxic within the meaning of the Environmental Protection Act (Ontario).
Ordinarily, this would be a shocking thing to read.
But given what’s written in the previous clause, this should come as no surprise…
The Buyer acknowledges and agrees that the Seller will not be filing the Declaration of Occupancy Status in respect of the property/unit and that the Seller will have no liability for Vacant Home Tax/Vacant Unit Tax levied pursuant to the relevant municipal by-laws, if applicable
Once again, the buyer has to understand that the seller will not be doing things that any seller, in a typical, standard, resale transaction would otherwise do.
If the property was vacant and a tax would apply, no matter. The seller is having nothing to do with it.
If the property wasn’t a primary residence, we’ll never know, because the seller isn’t going to file the requisite notice with the municipality.
If there are ramifications down the line, it’s up to the buyer to deal with them.
The Seller makes no representation whatever with reference to any tenancy or occupancy of the Property or as to the legality of rents for the Property. The Seller will deliver only such documentation relating to the tenancy or occupancy that is in its possession or control. The Seller shall not be required to produce any document signed by the tenant confirming the status of the tenancy or occupancy or to provide any credit or other adjustment for any current or prepaid rent or interest thereon.
It’s already bad enough to purchase a propety under power of sale and accept the clauses we’ve already read through.
However, can you imagine doing so when there may be a tenant in place?
I say “may” because, once again, the seller doesn’t really have to verify.
Is that tenant there legally? Who even knows!
Do they pay their rent?
I guess we’ll never know, since the seller doesn’t have to provide any documentation whatsoever.
There will be no adjustments whatsoever after closing, including without limiting the foregoing, adjustments for realty taxes, business taxes, property assessments, sewer levies, water, hydro and utilities.
You and your lawyer had better figure out everything, right down to the penny, before closing. Because once the sale is completed, you have no recourse.
Then again, if you’ve read the above clauses, you’ll see that the seller really doesn’t owe you anything before closing either…
In the event that the Seller’s ability to transfer title to the property in accordance with this Agreement is placed in issue by requisition, notice, certificate of pending litigation or in any other manner, or vacant possession cannot be provided, the Seller may extend the closing date for a period or periods of time not exceeding 60 days in total. If the Seller is unable or unwilling to resolve such issue for closing or for any extension period or periods of the closing, this agreement may be terminated by the Seller without liability of any kind to the Buyer and the deposit returned without interest or deduction.
Any time you see the words, “this agreement may be terminated by the Seller without liability of any kind,” you should give some serious thought to why you would enter into a contract like this.
In the case described above, they’re noting that if the seller isn’t able to transfer title for any reason (such as litigation, vacant possession, etc), then the seller can extend the closing.
However, if the seller can’t resolve these issues, then the seller can terminate the agreement!
As a buyer, you need to ask yourself: What happens if your agreement is terminated? Then what? Were you planning to move into this property? Did you sell your existing home or give notice on your rental?
The Buyer agrees that the Seller may, in its absolute discretion, accept, on or before the closing date or any extension thereof, part payment or redemption of the Mortgage by any party having an interest in the Property and, thereupon, may terminate the Agreement without liability of any kind to the Buyer.
This explains that if the owner of the house, who has presumably defaulted, is able to make good on their payments, then the Agreement may be terminated.
So now what? The buyer has to bide his or her time and hope the owner doesn’t dig up a bag of gold coins, buried in the backyard?
Most buyers want some form of control or certainty over when the deal closes, but more importantly – if it closes.
The Seller in its sole discretion, may terminate this agreement without liability of any kind to the Buyer and the deposit returned to the Buyer without interest, penalty or deduction.
Here we are, wasting our time with the previous clause where the seller can terminate for reasons like “inability to transfer title,” when all the while, there’s a subsequent clause that simply says “we can terminate this at any time.”
No reason given.
Simply, “We can get out of this deal at any time, for any reason, with no explanation.”
So then, what if the buyer purchased a property for $500,000, and two days before the scheduled closing date, the seller is offered $520,000? They can exercise this clause, terminate the Agreement, and re-sell the property.
Why would anybody ever purchase a property with this clause?
For those of you that figure every power of sale is some run-down home being sold for land value, and maybe these clauses above aren’t all that problematic, think again.
Do you know where I found these?
On the listing for a condo.
And what’s more, is you could probably ask, “Why would the sale of a condo have all these clauses about easements or items that don’t apply,” and you’d have more insight into how power of sales work.
These “standard clauses” go with every power of sale, regardless of the type of property, location, or price point.
It’s not uncommon to see clauses about “well water” or “shorelines” in the Schedule attached to a listing for a residential condo.
There’s zero flexibility when it comes to power of sales. The seller/bank/agent works they way they want, come hell or high water.
Try reaching them on a weekend to present your offer.
So while I might be able to see a time or place whereby accepting the clauses and conditions outlined above would be acceptable, I think it would represent less than one-tenth of one percent of real estate transactions. Think of an institutional investor and/or one who specializes in the purchasing power of sales.
For “Jane & John” looking to buy that first home, I see no reason to get involved with this…