We often hear about the bargains and 'get rich' possibilities of buying Foreclosures. Of course, like everything in life, it is not that simple or easy. There can be some great buys, but there can also be a lot of risks and cases where as a buyer you should run away as fast as you can. Each situation will be different, but if you understand the process you will be better prepared to analyze your options. Using a REALTOR® who has experience in buying and selling Foreclosures can also help you immensely.
There are two types of sales, that involve a bank or lender selling property.
This is the less common of the two types of sales. In this case the court has given the lender full ownership of the property. The sales process is like any normal property (there is no bid-up process as discussed further).
Often a lender will only receive order absolute after previously trying to sell the property. In some cases this will involve a mortgage insurance company (like CMHC) stepping in after a previous attempt by the original lender to sell the property.
The big advantage to "Order Absolute" is the no bidding-up process. The disadvantage or risk is summed up with this question: "why the property didn't sell in the first round?"
Conduct of Sale
The most common type of Foreclosure is when the court authorizes the lender to market the property for sale. This usually involves the lender doing a market appraisal estimating the value of the property, and then listing it with a REALTOR®. In this situation the lender does not take ownership of the property, and they have very little responsibility or control over the condition of the property- and the sale truly is "As is/Where is" with no warranties or guarantees.
In many cases the property will be vacant, but in some cases the property will have the people who defaulted on the loan, their family, tenants, or some other random people still living on the property or still having access to the property. This presents an extra element of risk, there is the potential that there could be further damage, some fixtures and appliances which would normally come with a property might disappear, and in the most extreme cases people who refuse to leave when the buyer gets legal possession.
The best 'deal' and the best time to put an offer on a Foreclosure is usually not when it is first listed. The lender and their lawyer usually have a schedule or a plan for reductions in the price, and the longer the property is for sale, generally the lower the price will go- until it sells; but if you wait too long you will join a line of people also interested in the property.
The smart buyer will often spend the time and energy, and in some cases invest in inspections and other forms of due diligence. It is a bit of an art and science to decide how long to watch and wait for a the price to reduce. The longer it is on the market and the lower the price goes, but also more people notice and the greater the chance that someone else will put an offer or a later put a bid in at court.
Let's say you have watched the property for several months, it has dropped in price and you are ready to put an offer in. You can submit a conditional offer, subject to the regular things like Financing or Home Inspection, and this will allow you to negotiate on price with the bank. There is generally some negotiating room from the asking price, but only some. Depending on the situation and value of the property, the range can sometimes be 10% or $10,000 (not set in stone). It is extremely unlikely that the lender will take some kind of low-ball offer for 60% of the asking price.
Assuming you are able to get your financing arranged and reach the point of removing conditions- this is when the fun begins. Normally an unconditional sale would pretty much be the end of the process, in this case it is more like the middle point. With an unconditional sale in place, the bank then secures a court date for the judge to review the offer.
When the court date is decided, which could be anywhere from two weeks to two months (give or take), and in our area could occur in Cranbrook or in some cases in Nelson (and in very rare cases even Vancouver)- the information regarding the court date and the PRICE for your unconditional offer is then advertised by the Listing REALTOR® to other agents in the area to encourage them to bring forward more offers at court from other people interested in paying more for the property.
In order for someone to submit a bid in court and try to buy the property when they did not have unconditional accepted offer, they need to be able to submit an offer that has no conditions, and they have to be in the position to pay a deposit the same day and generally speaking be able to complete the sale 30 days after the court approval.
Earlier- the message about due diligence and doing your homework ahead of time is really important if you have been watching a property and someone else puts the offer in first, this is where knowing information about the property can be a huge advantage and put you in the position of deciding whether or not to bid on the property at court.
Back Up Offer
Almost always the person with the accepted offer who has triggered the court date will be pretty emotionally and financially invested in completing the sale, and hopefully they were able to negotiate a great purchase price. In almost all cases, this buyer will have prepared back-up offer which they will submit so that they can compete with any other offers which might come in at court. If there are not other offers submitted, then their initial offer will most likely be accepted by the court (although in theory the judge/master could order that the property is marketed longer or refuse the offer).
Bids at Court
The process for the bids at court are not like a fancy car auction. You get one shot, and that's it. The court will receive bids in sealed envelopes, in order to be considered these bids generally need to be on standard Contract of Purchase and Sale forms, have no conditions, and include a deposit cheque. The judge or master will then review all of the offers, and in most cases will order the sale to the highest bidder. In some cases where two parties have almost identical bids, the judge/master may choose to award the sale to the party with original accepted offer (usually they have invested the most time and money into the process).
After the sale is approved at court, the court documents will be sent to the REALTORS® and lawyers, usually they will specify the closing, completion, and possession of the property will occur 30 days after court approval.
If you know a lot about a property or you have extra skills and abilities to fix things up- and you can see past what is often a mess or unfinished renovation- then you might be the perfect buyer for a Foreclosure. Unknowns usually drive down value, so if you can figure out answers- then you will have a great sense of the potential current and future value.
On the other hand, if you can't find out much about the property, there are still people living there, or something doesn't feel right- it might be worth walking away. Although in all real estate purchases there is a strong degree of "Buyer Beware"- that is even more so the case with Foreclosures!
If you would like more information about what court ordered sales are listed right now, please feel free to contact me!