Understanding Foreclosures, Power Of Sales, Tax Sales, And Tax Liens

We are receiving numerous calls lately from buyers looking to buy properties at prices substantially below market values.

Many buyers inquire about power of sale properties believing it will be sold at deeply discounted prices. One of the fallacies or misconceptions about a power of sale purchase is that the lender is only interested in selling it at a price that will allow them to recoup all mortgage and legal costs.

This article will help you better understand the various government initiated property sales and what opportunities exist as a potential investor.

There have been many television programs and seminars that teach investors how to buy properties significantly below market values. Typically, these properties are either foreclosures or tax auctioned properties. These opportunities are mostly found in the United States (although there are tax property sales in Canada).

Foreclosures

In the United States, the lenders typically foreclose on the rights of the previous owner if they are in default on their mortgage. Once this process is completed, it enables the lender to sell the property at any price they desire. This is in sharp contrast to the power of sale process, which I will discuss later in this article.

Tax Sales

Tax sales allow the tax department to sell the properties in order to recover outstanding tax bills. There is usually a public auction held and the highest bidder is awarded the property. Typically, a deposit is required and the balance is due within a two week period. This procedure varies from municipality to municipality.

Quite often these properties are vacant land (such as bush lots and timberland), farms, cottages, houses and commercial or industrial properties. Whilst it is possible to buy these properties at well below market values, they are usually not located in highly marketable neighbourhoods. In Ontario, an individual would have to be at least two years in arrears before the local government could force a tax sale.

Tax Liens

A tax lien is an government program that allows investors to pay back taxes on properties in tax arrears. The property owner than has a certain amount of time to pay back the taxes plus a very high interest rate or forfeit the property. If the money is paid back, all the money is sent to the investor (usually with a very high return on their investment). If the owner does not pay, the investor can foreclose on the property and receive it free and clear. Typically tax liens are not exercised in Canada.

Power of Sales

As eluded to earlier, in Ontario most lenders utilize the power of sale remedy as a means of enforcing a sale against a mortgagee (borrower) who is in default.

I will outline the duties of the mortgage holder in Ontario when a property owner has not made his required mortgage payments. It is important for a mortgage holder to do the following once in possession of the property:

If a property is being sold under power of sale there are some duties that a mortgage holder has to adhere to. The seller must try to attain a reasonable offer. Reasonable implies an offer that is representative of market value. The reason for this requirement is that in contrast to the foreclosure process any funds, after all costs have been adjusted for, will be returned to the mortgagee (borrower). If there is a shortfall after the sale, the lender can proceed to sue the borrower for any deficiency. The lender before putting the property for sale will typically obtain three independent appraisals. This will provide them protection should a mortgagee (borrower) later decide the property was sold substantially below market values.

Additionally, all lenders sell properties in an “as is”, “where is” condition. They are not in the business of selling homes and as such do not make any expressed or implied warranties about the state of the property. The buyer is required to do their own due diligence which includes hiring a professional home inspector to satisfy themselves of the structural integrity of the property.

It is surprising to see so many people who wait until the bank is knocking on their door before they take initiative. Usually, at this point in time, it is too late.

If you have equity in your home and you are experiencing financial hardship, I would advise moving decisively with a plan of action so that you minimize any unnecessary costs. This can include either selling or refinancing your home. Once it is in the hands of the banks, costs can be sizeable.

If you are a buyer looking for a deal, power of sale properties should be included in your search but understand the limitations.