It’s no secret that the housing market in Canada is red hot. As a result of the increasingly high property costs and competitive bidding atmosphere, some buyers may be seeking foreclosed homes in the hope of finding a great deal. If you’re on the hunt for a new home but feel like you just can’t afford anything, take this opportunity to learn more about the benefits of purchasing a foreclosed home, what the foreclosure process looks like and what you can expect when you decide to place an offer on a foreclosed home.
What Is A Foreclosure?
Foreclosures aren’t incredibly common in Canada. Lenders often don’t want to go through the foreclosure process as it’s quite expensive and time consuming. That being said, this doesn’t mean they don’t happen at all.
A foreclosure, by definition, is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as the collateral for the loan.
Unlike a short sale, it’s a process the lender initiates when a borrower fails to make a certain number of mortgage payments in a row, typically four payments or 120 days of default in total. In order to recoup this loss, they force the borrower to sell the home.
Types Of Foreclosures
There are two different ways a lender can sell a repossessed home and you’ll want to understand them both, should you encounter these terms while you’re house hunting.
Frequently seen in British Columbia, Quebec, Alberta, Saskatchewan, and Nova Scotia, a Judicial Sale is when the lender has to petition to the judicial court for permission to sell the property. This process can get expensive and time-consuming, as it involves a lengthy court case and legal fees. Lenders are able to begin the foreclosure process after the first loan payment defaults. Soon after, the legal proceeding may start, and the borrower will be served with a Statement of Claim for Debt and Possession. They will also be given 20 days to file a Statement of Defence in response.
If the borrower loses their case or doesn’t choose to file a Statement of Defence, the lender is granted permission to sell the home. The whole judicial foreclosure process can take several months to a year. Once the process is over, the lender can sell the property with the help of a real estate agent or through a real estate auction. A large portion of the return they see from reselling the property will then be used to cover their legal fees.
Power Of Sale
Most common in Newfoundland, Ontario, P.E.I. and New Brunswick, a Power Of Sale occurs when a lender has the legal right to sell the property and avoid judicial court process altogether. This would likely be included as a clause in the home buyer’s mortgage contract.
Generally speaking, the lender can repossess the property if the borrower has defaulted on four mortgage payments. However, it’s possible that a redemption period may be given to the borrower (typically 35 days) to cover missed payments and other fees. If the borrower fails to make up for the missed payments within that 35-day redemption period, they’ll be served an eviction notice and will have 30 days to vacate the property. The lender can then choose to sell the property through an auction or via a traditional property sale.
Pros Of Buying A Foreclosed Home
While spotting a foreclosed home for sale in Canada is rarer than you might think, there’s still a chance you may encounter one while house hunting, so it’s best to understand the pros of buying a foreclosed home in advance.
- It’s likely that the lender will want to sell the property quickly so they can recoup their loss and move on. This means it’ll likely be a lower price and a great deal for you!
- If you’re wanting to buy a property to buy/renovate and rent out, a foreclosed home can be a good, affordable way to get into the real estate market.
- You won’t have to worry about any past liens or backdated taxes as the lender expunges these to ensure a quick sale.
- If you end up getting the property for a lower price, you can use the money you saved for home renovations to increase the overall value of the property, and your home equity in the process.
Cons Of Buying A Foreclosed Home
Where there are pros, there are also cons. Understand the downside to purchasing a foreclosed home so you can weigh your options and determine if it’s a good fit for your personal situation.
- Not all foreclosed homes come at an incredibly low price. In fact, most of them won’t.
- Given the incredibly competitive real estate market, the property could be scooped up quickly if it’s in a very desirable neighbourhood. The property’s location could also end up increasing the price more.
- Most foreclosed homes are sold on an as-is basis which means you’ll have to cover any repair costs and sometimes remove possessions that have been left behind.
- When it comes to buying a foreclosed home, the legal and financial proceedings are a lot more complicated and stricter than a standard property sale would be.
- The terms of the mortgage contract may absolve the lender from all current responsibilities pertaining to issues with the home and could also pertain to future liability as well. This means if any foundation, electrical, zoning issues, etc. come up after the sale, the onus is on the buyer alone.
- You’ll still be responsible to pay a land transfer tax. In Ontario, that breaks down to 1% for homes under $200,000, 2% for homes of $200,000 – $2,000,000 and 3% for homes over $2,000,000.
- It may be more difficult to schedule a physical viewing of foreclosed properties due to hydro being turned off, potential property damage etc.
Steps To Buying A Foreclosed Home
Buying a foreclosed home is not as simple as a typical property sale. It’s important to understand the steps you’ll need to follow to secure financing and ensure you’re approaching the opportunity with the proper precautionary measures in place:
Hire A REALTOR®
A home is one of the biggest purchases you’ll ever make and since buying a foreclosed home is a lot more complicated than putting an offer in on a regular property, you’ll definitely want to hire a REALTOR® to help you navigate this process. Having a conversation with a REALTOR® before pursuing the purchase of a foreclosed home can also help you get answers to specific questions and learn more about the process to see if it’s something you can pursue or if you’re better off avoiding it altogether.
Inspection And Appraisal
One of the easiest ways to make sure you’re getting a good deal is to have the property inspected and appraised. This will help you better understand its value and what you’re really getting for the price.
Creating A Budget For Costs
Buying a foreclosed home brings with it many costs that can add up fast if you don’t know about them in advance. While you can’t predict everything, there are a few costs you should consider when creating a budget:
- Utilities will likely need to be transferred and switched on
- Some renovations may be required to make the space useable or safe
- You should immediately change the locks
- Property and land transfer taxes as mentioned above
- Any necessary administrative fees
- Any titles or permits required (garage, deck, additions, etc.)
- New appliances/furniture for the space if you don’t already have it
- Fixing any damage that may have occurred after you first visited
The Application Process
Whether you’re buying at auction or using a real estate company, the approval process is just as necessary as it is with any mortgage. To give yourself the best chance possible, consider the following tips for increasing your likelihood of being approved:
– Check on and improve your credit score in advance
- Work on increasing your income level and padding your savings accounts
- Prepare to offer a sizeable down payment
- Update and organize your persona/financial records
- Pay down as much of your outstanding debt as possible
Making An Offer
Once you’ve gathered the necessary information, worked with your real estate agent to complete your due diligence and you’re confident that buying a foreclosed home is the right decision for you, there’s nothing left to do but make your offer!
Buying a foreclosed home in Canada doesn’t have to be complex and scary. Hiring the right professional to help you navigate and understand the process is crucial to a positive outcome. Want to learn more about your financing options? Still have questions about foreclosures or short sales? Our team can help!