Foreclosures are big news in the U.S. The real estate crisis is dragging on, and economic problems are keeping the default wheel turning. As a result, foreclosures are becoming a new kind of American dream, one with big winners and big losers; the stuff of exuberant headlines and popular reality TV shows. In the U.S., foreclosure properties can sell for rock-bottom prices. And when we say rock bottom, we mean full houses for the kind of price that wouldn't even buy a new compact car.
Amazing, right? Well, don't rush out and look for a foreclosed property just yet, because in Canada, a whole different set of rules and laws prevent these steep discounts. Find out how foreclosure works, and why for Canadians, a foreclosed property is often more trouble than it's worth.
What's a foreclosure?
Foreclosure is the worst-case scenario in home ownership. Remember that a buyer who has a mortgage is essentially living in a house that's owned by the bank; fail to make your payments and the lender has the right to gain ownership of the property and sell it to settle the score. Of course, homeowners in the U.S. default on their mortgage loans, too, but what happens next is quite different, and determines why foreclosed homes there can be such a bargain for buyers.
The fair market value rule
In the U.S., banks look to sell foreclosed homes to recoup the outstanding loan on the property. And although foreclosure rules vary from state to state, the key thing to know is that foreclosed homes are often sold at auction to the highest bidder, often for only as much as is outstanding on the loan. The problem is that this amount may be considerably lower than what the house is worth, and essentially hangs the delinquent borrower out to dry. Of course, that's great news for anyone who steps up to buy the property for pennies on the dollar.
In Canada, these cut-rate deals just don't happen. Lenders are required to sell foreclosure properties for "fair market value," and they must follow strict procedures to prove they are selling a foreclosed property for a fair and reasonable price. So, buyers looking for a good deal may be better off seeking out homes that have been on the market for a long time and trying their luck with desperate sellers. Those sellers have the right to take less, while the bank often does not.
More responsibility for buyers
If the bank has the title of a foreclosed property, it's typically sold "as is, with no warranty or representation." For buyers, this means that what you see is what you get. The property may or may not have hidden defects, there's no guarantee of "chattels" like appliances, and they may or may not work when you move in. If there are any encroachments or issues with the land survey of the property, the buyer will be fully responsible.
Of course, any home can have issues, but in a typical real estate purchase, a buyer is given the opportunity to list these things as conditions in the real estate contract. This puts the seller on the hook for including certain appliances or other items in the sale, disclosing any serious defects the home may have and allowing potential buyers to obtain a real property report to check for encroachment and ensure that any additions to the home meet local codes. In a foreclosure sale, those protections go out the window, which can mean the possibility of additional costs for buyers.
Here's something foreclosure properties in Canada and the U.S. have in common: they're often short on fit and finish, and may lack appliances, fixtures and other things you'd expect to be included in a home purchase. This is because when banks alert homeowners of a default and put the foreclosure wheels in motion, angry owners sometimes damage the property and often take everything that isn't attached with them when they leave. Furthermore, homeowners who are struggling financially may have fallen behind on a home's basic upkeep. What this adds up to is "handyman specials" - and these properties aren't nearly as quaint as the term would suggest.
The "for sale" sign isn't a sure thing
During most foreclosures, the court gives the borrower time to repay the loan in full and reclaim the home. This period is usually six months long, but the home can sometimes be listed during this period. For buyers, this means that if the home's previous owner can come up with the cash and sweep in before the sale closes, they'll get their house back — and the new buyer will be left standing at the curb. According to Brian Macdonald, a real estate agent who often works with foreclosed properties in Edmonton, the courts also have some leeway in determining how the house is disposed of, and it doesn't always work to an outside buyer's advantage. In the end, it's quite variable, which means a lot of possible outcomes — many of them impossible to predict.
Not worth the effort?
In the U.S., the extra trouble surrounding buying a foreclosed property may be well worth the effort if you walk away with a home for as little as $5,000 (yes, you read that right). The reality is that this just doesn't happen in Canada. To put it plainly, don't go out hunting and expecting a deal. You may as well walk on down the street and eye that fixer-upper that's been sitting on the market just a little too long...a good cleaning and paint can do wonders.
GoldenGirlFinance.ca is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.