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Can You Save By Buying a Foreclosure

by | Jul 28, 2016

Chances are, you’ve seen real estate listings that end with terms like, “as-is, where-is” or “court ordered sale” or even “offers subject to court approval” and wondered if the listing prices were real. Or even wondered if you should be looking at foreclosed properties in order to make or save a buck.


My advice to you is to run the other direction as fast as you can.


Let’s begin with the foreclosed property sales process to see why:


In B.C., the process of taking possession of a property in default and then reselling it takes about a year, then another six months for the sale. During this time, the Mortgagor (the owners) can live in the property subject to only to allowing reasonable access to the realtor. They can live in the property without paying a penny against the mortgage, potentially to the final closing date.


Some, like the Smith family, who have fallen on hard times, treat this as an opportunity to get back on their feet and continue to take pride in their home and ensure that it stays in good shape.


Others, like the Jones family, have rented the property out since they bought it, haven’t maintained it, and now that they are in default, abandon any pretence of caring for the property.


After a year’s worth of legal action, the mortgagee (the bank or whatever financial institution the mortgage is with) meets with a judge and agrees on a price to list the property at. The Judge, who acts for the benefit of the mortgagee (the Smiths or the Joneses), insists that it be at the fair market value.


The property is then listed. It sits on the market for three to six months, the listing price drops regularly.


At some point, someone approaches the listing realtor with an offer. Because the place is listed “As-is, where-is”, all of the normal subjects and conditions have to be removed before the offer is represented. There is no allowance for financing, inspection and remedying existing problems. Even the normal disclosure statement will not be provided.


It’s entirely up to you to have all your ducks in a row (and theirs as well) prior to submitting an offer.


Once the offer is agreed upon by the bank, the listing realtor takes the offer to court for approval. If your realtor is smart and experienced, you tag along. Once in court, the offer is presented to the master for review. If anyone else has been interested in the property, they now take the opportunity to come in with a competing, sealed bid on the property. You will be given an opportunity to counter, but its basically guesswork as to how much to bid.


The successful bidder is now instructed to close within a very short period of time.


Because the bank are selling the property under a legal order rather than as an owner and because you are buying “as-is, where-is”, they cannot be held accountable for any damage incurred between your last inspection and the possession date. They will make every effort to prevent it, but what if the Jones family, angry at what’s happened, entered the property and trash the place, or remove all the appliances and fixtures for their next rental property?


Remember there are no subjects on your offer – you can’t cancel it no matter what. Then there are the clean up and fix up costs which you and you alone are on the hook for.


In the end, buying a foreclosed property may end up costing you more than buying the property for sale next door to it that’s move in ready.


Still not convinced? Still want to give it a try?


Here’s some advice on going ahead:


-Find the most experienced realtor you can and stick to him or her like glue. This is not a task for your Uncle Manny, no matter what a great guy he is. There are about a dozen or so realtors (B.C. again) who specialize in selling foreclosed properties. Someone like that who has handled dozens or even hundreds of foreclosure sales can provide valuable service in ensuring the transactions flow smoothly.


-Find your financing before you start looking. In terms of financing, the best (and possibly only) terms you will get will be subject to less than 65% loan to value. Make sure you have easy access to the 35% cash commitment ready.


-Have lots of experience in the building trades or have experienced family or a friend who can come with you on the walk through. Nothing says buyer’s remorse quite like the crack in the foundation you failed to notice on first look or underestimating the clean up costs by $100,000.


-Find a qualified inspector with a good reputation and when you’ve found a property, pay him well to tell you what’s good and bad.


-If you’re looking at a condo with a special assessment due and the bank says they’ll pay the special assessment, remember they’ll only pay that one. I guarantee you there will be a second one, which you will need to factor into your costs.


-If you are wanting to buy a foreclosed grow op, make sure the damage has been remediated and a clearance certificate has been issued. No one will finance an unremediated one! Note, there are only about three lenders who will finance one with a clearance certificate.


-Don’t think you can shortcut the process by contacting lenders directly. Remember, the decision maker is the Court’s Master, not the bank or credit union.


If you are still interested call or email a mortgage professional at Dominion Lending Centres!


Thank you to my DLC colleague Jonathan Barlow for this article.

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