Written by Paul Hecht
Tuesday, 26 April 2011 12:01
Sounds great doesn't it? This is actually a headline from a database subscription company offering to show you how to buy foreclosures for 50 cents on the dollar. Unfortunately it is a U.S.- based service. You won't see those kinds of headlines in Canada since the foreclosure process here is much different than in the U.S.
I've purchased homes directly from owners who are facing foreclosure as well as represented major Canadian lenders as a Realtor selling their foreclosures (otherwise known in the lending world as "non-performing assets"). I can tell you first-hand that once a lender has taken control of a property through foreclosure in Canada, buying a Canadian foreclosure is not as lucrative as in the U.S. This is mainly due to the way Canadian lenders are regulated on how they are allowed to dispose of their "non-performing assets." Understanding the foreclosure process and lender regulations will help you realize why.
Foreclosure is the legal right of a mortgage lender or other third-party lien holder to gain ownership or the right to sell the property and use the proceeds to pay off the mortgage, legal fees, commissions, court costs, utilities, etc., when the mortgage or lien is in default. The process is different in Canada because the laws in Canada are different.
The way a mortgage or lien holder gains ownership after default varies from state to state in the U.S. as well as province to province in Canada. In Canada, there are two main methods that a lender can use. Without getting too far into the technical details, the first involves the lender taking title to the property and then selling it. The other allows the lender to control the sale of the property through a court order without having title.
Generally speaking, U.S. and Canadian banks want their "non-performing mortgages" off their books so that they can lend out their money again and collect interest from performing loans. They are not interested in becoming landlords or flipping property.
The lender's goal is to get back what they have lent out on the mortgage plus legal fees, commission, court costs and expenses. The objective is the same whether in the U.S. or Canada - to get their money earning interest again.
However in Canada, a lender must protect the homeowner's equity. Therefore, the lender must attempt to obtain fair market value. Herein lies the major difference. Regardless of how the lender goes about selling the property or what is owed on the property, under the Canadian Securities Act a lender is mandated to achieve fair market value. Therefore, buying direct through the lender's backdoor at a huge discount from residential lenders in Canada is unheard of.
The typical process a lender takes is to initially phone the borrower if a mortgage payment has been missed. If after 30 days, the lender still does not receive the mortgage payment, the lender's lawyer will send a Demand Letter stating that because the borrower is in default and has not made payment, they must now pay off the entire mortgage balance.
If the mortgage is not paid off immediately, the lender's lawyer will start the foreclosure process. At this point, the homeowner has a redemption period in which they can either refinance or sell the property to pay off the outstanding mortgage plus legal fees and interest, even though the foreclosure process has already started. The redemption period is typically six months during which the owner still retains control of the property.
Once the initial redemption period is over and depending upon the province, the homeowner or any other lien holder may request an extension of the redemption period of up to six additional months. If the homeowner has ample equity and acting cooperatively, the court will often grant the extension. If the homeowner has very little or no equity then the redemption period is not extended and the lender takes control through either a Final Order (becomes the owner) or by Conduct of Sale (takes control of the sale).
Once the lender has control either way, they hire a Realtor who provides the lender with a comparable market analysis. The lender also obtains an independent appraisal. The lender will often use the appraisal and set the asking price at or close to the appraised value.
Since the lender is mandated to get fair market value, they must prove in court that the home was properly marketed and seen by enough potential buyers to achieve a final accepted offer. A lender cannot accept an offer that is substantially lower, especially in the beginning, as there will not be enough proof that the lender attempted to obtain fair market value. As time passes and based on showing and market activity, the lender may lower the asking price every two to six weeks.
As the lender reduces the price, many buyers wait for the price to go even lower. Unlike many sellers, a lender will continue to reduce the price on a foreclosure until they get an offer. However, eventually the price is ripe enough that someone will make an offer. Depending whether the lender is the title holder or conducting the sale through a court order determines whether the offer requires court approval, or not.
If the lender has title, then no court approval is required. Therefore, once an offer is accepted and the buyer removes their conditions, the sale is final. If the lender is conducting the sale through a court order, an offer is accepted, the buyer's conditions are removed and then a court date is set for final court approval. The major difference is that other buyers can make unconditional offers at court and outbid the initial buyer. Therefore, understanding the way the lender has foreclosed is important when making an offer.
Since Canadian lenders have to ask fair market value and use a Realtor to sell the property, paying for a subscription to Canadian foreclosures in your area is a complete waste of money as you can get that information from any local Realtor for free.
If you want more information about buying Canadian foreclosures in your area, start by Googling the Canadian Bar Association for the correct legal facts about your provincial foreclosure laws. For foreclosure listings, ask a local Realtor to set you up on an automated email list of new foreclosed homes as they come onto the market.
As an investor, some of the best deals in Canada are made during the redemption period when the seller still has control. That's not to say that you cannot get a great property at a great price once the bank controls the sale either. However, foreclosures at 50 cents on the dollar are not likely in Canada anytime soon.