Be wary of power of sale pitfalls
I’m thinking about buying a “power of sale” home. Is there anything I need to know?
Before I get into my response, I’d like to take a moment to clarify what we’re talking about: A home is sold by “power of sale” when the homeowner defaults on their mortgage. The bank then sells the property in order to cover the amount still owing on the mortgage.
People are often attracted to power of sale properties because they expect to get a deal on the purchase. But it’s not a “fire sale” type of situation. In fact, banks are obligated to get market value for the property.
The bank also won’t be able to provide assurances about the condition of the property because they don’t have detailed knowledge about it. Typically, when you work with a seller you can negotiate with them to repair certain issues as part of the transaction. But when you’re buying a power of sale property, it’s sold “as is.”
That doesn’t mean it’s not worthwhile to purchase a power of sale property. In fact, there are steps you can take to make sure you understand what you are buying.
As always, I highly recommend a home inspection from a qualified home inspector, engineer or contractor. They can identify underlying problems with the home’s major systems, such as heating and cooling, electrical, foundation and so forth. When you make an offer on the property, you can make it conditional on your satisfaction with the inspection results. This clause may allow you to walk away from the deal if the inspection uncovers a costly issue that you don’t want to deal with.
It’s also a good idea to seek legal advice when buying a power of sale home, especially if the owner or tenants are living in the property. Your lawyer will also perform a title search to identify potential issues, including liens against the property, and will review the lengthy documentation that the bank will provide.
Finally, you should be aware that the offer process may take a little longer than normal because the bank has processes to follow and their staff typically only handles offers during business hours. The bank may also retain the right to call off the deal if the owner catches up on their mortgage payments before the sale closes. Although, in practice, banks rarely cancel a sale, it’s still a good idea to find out if they will include a “right of redemption” clause in the Agreement of Purchase and Sale.
There’s nothing wrong with considering a power of sale home. But it’s crucial to do so with your eyes open to potential issues. Joseph Richer is registrar of the Real Estate Council of Ontario (RECO). He oversees and enforces all rules governing real estate professionals in Ontario. Email questions to askjoe@reco.on.ca. Find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at youtube.com/RECOhelps.