Are Foreclosures & Power of Sales Really a Deal?

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Every so often I hear someone tell me they’re looking for a FORECLOSURE because they want a significant discount.
Especially during times of a Pandemic or  …..  a recession.

They’re setting themselves up for so much risk and disappointment.

Here’s WHY … and how to avoid that.

First of all … many people tell me [if they think their cash-flow is tight or they can’t afford what they want they’ll just wait for a FORECLOSURE to hit the market or become available.

It’s important to clarify that Foreclosures is a U.S. term.
In Canada we have “Power   of   Sales”.

Now you might be thinking … “Ya … SAME THING” …  but they’re not.
It’s important to point out the difference.

People think of the word “Foreclosure” and equate it to the word “discount” because of what they heard in the news back in 2009-2011.

But that was in the U.S.
And in the U.S. the laws are different.

And as we saw back in 2009-2011 …when banks FORECLOSE on a property.
They just want to sell-off the property to get back what they’re owed.  Hence the “discount”.

So if a property would sell for $800k but the mortgage was $575k then the bank might just try to sell the property for $575k instead of $800k.

And legally they can do that in the U.S.
The term they use is actually “Bank-Owned-Properties”.

But, in Canada the Banks and Lenders are legally obligated to sell a property that they took back from an owner under “Power of Sale”  at Fair Market Value.

In the same example I just used … the bank would have to sell it for $800k  … they’d get back their $575k plus fees and penalties.

Then they are legally obligated to give the remaining equity if any back to the owner.  The laws exist to protect homeowners.

Secondly,  we have to use common sense.  Even though everyone would like a deal and hope for a deal including me!

So we have to remember the reason foreclosures happened in the US was that the economy crashed.

As a result … supply went way up & far outweighed demand which drives prices down.  Not the mere fact the bank or lender was selling the property.

Here in the Greater Toronto Area … now … and for the foreseeable future our DEMAND exceeds SUPPLY.

That’s what has fuelled our real estate market for years.

And as immigration continues to increase (which our Government indicates it will) … there’s no sign of demand decreasing any time soon.

In other words demand won’t decrease because some people might  have been out of work for a while because with the immigration volume we are seeing  …  THAT … is why demand is surging!

This is relevant because if a bank forced Power of Sale and then listed that house for sale  … they wouldn’t give it away for a huge discount … if  they don’t have to.

Why would they?  They don’t have to AND they’re not allowed to.  The property will sell it for Fair Market Value.

So waiting to buy because you think you’ll find a “DEAL” with a Power-of-Sale is setting yourself up for disappointment because it likely won’t happen.

Power-of-Sales come up all the time.  But they always sell for Fair Market Value.  And it’s easy for me to print out the recent Power of Sales in ANY market region  … if you’d like to see for yourself.

Now … as for risk of buying a Power-of-Sale property … that can be huge.  I’m not saying nobody should buy a Power of Sale.

But if you’re looking for a huge discount because of affordability then chances are you’re also looking for a home that’s move-in ready.

Meaning … you don’t have the financial or physical ability to fix a bunch of things that might be wrong with the property after you move in.

So something else most people don’t realize is that Power-of-Sale properties are sold in AS-IS condition.

When you buy an ordinary resale property … if you use a good Realtor to help you buy it … meaning to prepare your offer and negotiate for you there are  usually clauses that require the Seller to warrant (means give a warranty or to make sure) that things like A/C, Furnace, all Appliances, Toilets, etc. are all   WORKING properly when you get the keys.

If you moved in and the seller gave you a broken stove or washing machine or air-conditioner … the Seller would have to fix/replace it.

But when you buy a Power-of-Sale property in as-is condition you don’t have that peace-of-mind or security.

You likely would pay fair market value for a property and then possibly have to pay thousands more to fix some very expensive things.

Sometimes when you buy an “As-Is” property under Power-of-Sale … you might not be able to do a buyer “Inspection” either.

So … aside from appliances, there might be leaks in the roof or attic or shower leaks eventually coming down through the living room or kitchen ceiling below … that you didn’t know and will have to fix.

So advice I like to share with people is if you don’t have a huge budget … and you think it’s a strategy to wait for a Power-of-Sale … my advice is to NOT   wait for that because you might wait forever in terms of a “discount”.

And you also might buy a money-pit with more headaches than you’re prepared for.

But there are always options for you. Even if you have a limited down-payment or a limited overall budget … or … you’re looking for an investment property.
A high-skilled Buyer’s Agent (Realtor) would work with you and know the best mortgage brokers who can get you as much funding as possible.

But also find a  property in your price range … that won’t be risky … won’t have thousands of dollars of unexpected headaches & repairs in an area that you’re happy to live in  … and with clauses & conditions included in your offer to protect you!

In other words there ARE ways to work within your budget to find a property you like … but without risk or gambling with unknowns.

Don’t  just rule out the possibility of that without speaking to a professional first.

And BTW … when you work with a Buyer’s Agent … you don’t pay them.
So they can  help you and protect your interests at no cost to you … why wouldn’t you?[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]