Buying a power of Sale in Toronto?
Please read this article to learn the true facts;
I have written about power of sale properties in Toronto before and I have had an overwhelming demand by my readership to continue to touch upon this subject further.
First, let me begin by asking you a few questions. Raise your hand if you believe that when buying a power of sale that you are purchasing the property below the true market value? And second; once the purchase is in place and the deal has been negotiated between the bank and yourself that you can now call the movers and start making preparations to move into your newly purchased home once the deal is closed? Hopefully you won’t be too shocked to learn that if you raised your hand that you are absolutely in correct! Please feel free to sit down and take a moment if need be. I say this due to the fact of all the stigma that is attached with buying a power of sale in Toronto and the general public’s refusal to come to terms with the facts. The pros and cons can be discussed in great lengths and debated as well, I will start the debate by going on the record as saying “I don’t find any pros but I can see tons of cons”(please feel free to click here to read an article written by Bernie Jankowski Barrister and Solicitor) which will reaffirm my position.
As I said earlier in this article that this subject can be debated endlessly but allow me to explain in a nutshell. There are 3 main reasons to stay away from buying a power of sale in Ontario.
- - The property must be sold at market value and NOT for the amount that is outstanding.
- - Where is As is
- - The mortgagor’s right to Redeem
There are many differences between a power of sale and a foreclosure and this where I believe that the general public has a huge misunderstanding of those differences. Without diving to deeply into another subject that is foreclosure as this a subject entirely on its own that I will be writing about very soon. Just note this that a power of sale must be sold for true market value as the lender must oblige according to the provincial mortgage act. The mortgagor (owner) of the property has the right to any equity if any from the proceeds of the transaction. Here is an example; assume that Property “A” has a first charge with lender “A” for the amount of 300k and the subject property market value at the time the sale is being enforced by the lender is estimated at 500K. Its lender “A” responsibility to sell the property for close to 500k as the mortgagor as the right to the remaining funds from the sale, in this easy example that amount would be 200k. Now assume that lender “A” sold the property for just the outstanding loan amount plus its costs to enforce the sale then the mortgagor (owner) of the property would have the right to seek damages from the lender. It’s also important to note that Canadian banks are in business to earn a profit and that they are not seeking to profit from anyone’s misfortune. Lenders do not like bad PR (public relations) this is one of many reasons why Canadian banks opt to power of sale a property rather then foreclose as their counter parts do south of the border.
Where is, As is- This is a term that you will hear more often than not when dealing in this type of transaction and it simply means that the lender will not warrant anything regarding the state of the property from the time you see it to the time of possession. A simple example of As is would be; assume that the property is furnished with appliances at the time the submits an offer to purchase, and on the date of closing those appliances are no longer on site at the time of possession even though they were included in the agreement of purchase and sale. In this instance then the buyer is out of luck, so I hope the buyer has taken into account that their budget hopefully included new appliances.
The mortgagor always has rights, and one of those rights is the RIGHT TO REDEEM! In the event that owner of the property has come up with the necessary funds that are in default then they can take the property back from the lender. The mortgagor has this right throughout the process but loses its right to redeem if the lender has entered into a binding agreement of purchase and sale agreement with a buyer. This is when it can become very tricky! Most lawyers that I have spoken with about this subject agree that this is how they interpret the act, and I stress most lawyers. Some lawyers argue that the right exists up to the moment of closing on an accepted agreement of purchase and sale. My opinion is through tons of real life situations that the mortgagor has indeed lost its right once the property has been sold, but here is the twist. Remember when I stated that banks do not like bad PR? Well this is why any reputable lender would allow the mortgagor the right to redeem up until the very last moment possible.
So if you’re one of those buyers that have bought a power of sale and have yet to complete the transaction, don’t call the moving company until you actually have the keys in your hand, and make sure you have a backup plan in the event the mortgagor does in fact redeem!
Remember that as a buyer you are negotiating with the bank for the purchase of the property and not the property owner! And the bank has a legal obligation according to the provincial mortgage act to sell the property for true real estate market value! It’s also important to remember that a power of sale is NOT a foreclosure and therefore different legislation applies.
Knowing all this! Does it still make sense to pursue properties that are being sold under power of sale, or is the risk just too high?
I employ you to research and do your due diligence when buying Toronto Real Estate and always seek the expertise of a professional.
Please feel comfortable to contact me if you would like to learn more about buying a power of sale.
Please comment below so we could continue the conversation.