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The Truth About Buying A Property Under Power of Sale

Posted by Sherry Rioux on April 22, 2009

Real estate buyers have somehow been conditioned to think that buying a property listed under a power of sale arrangement represents an opportunity for a real deal.

I’ve noticed some REALTORS® capitalizing on this belief by advertising special websites to find out about these listings and, I’ve seen REALTORS® advertising the power of sale status right in their property ads for a listing.  The truth is, it does make the phone ring.  But should it?

While there are different remedies a lender can access when there is default on a mortgage loan, the most common one by far in Canada is where lenders exercise their right – that is their power, to sell a property when default has occurred.  After following a strict prescribed set of rules about notice to the home owner and other interested parties, lenders can use their power to sell the property.  Note, they do not take ownership.

What many buyers don’t know is that the homeowner who defaulted is still responsible for any shortfall in the balance of the debt owing.  That’s right:  A lender who sells a property for less than the outstanding debt, may sue the owner of the property for the shortfall.

And here’s the rub:  The owner of the property may sue the lender if they can prove that the sale was made for less than the value of the property.

So, the lender has an obligation to sell the property for fair market value or, they risk being sued by the homeowner.  Unlike the homeowner, the lender does not have emotional discretion or motivation.  The lender will have had property appraisals done and this will become the guideline for them as it is justifiable in a court of law.  If a property is not then sold for that amount or more in a reasonable period of time, they may begin to slowly reduce the price in small increments until a sale occurs.
For a buyer, this means that while they may feel they got a “deal,” chances of this are about the same, or sometimes worse than with an owner sold property.

Beyond price, there are other potential risks or downsides buyers should be aware of.  Almost all lenders have their own schedules of terms that must be included in any Agreement of Purchase and Sale.  For instance, in no cases will they give any warranties with respect to the condition of the property.  Heck, they have usually not even seen it!  They can also not include any chattels such as appliances or window coverings that may be present in the property as they have no claim on the ownership of those.  They may be there on the closing date or maybe not.  The schedule usually also includes something a bit scary for buyers and that is, a right of redemption by the owner.  This means that at any time, the owner can bring the mortgage back into good standing in which case the sale is called off.  In reality, this very rarely happens as the home owner would have mounting legal costs associated with the power of sale proceedings that they would also need to pay.

In any case, I would always recommend that potential buyers of these properties should speak with their lawyer about the contract.  No one else, including a REALTOR®, is qualified to give you legal advice.

There are things that you can do to reduce your risk including have a home inspection, making enquiries with the municipality about outstanding work orders, zoning or pending special assessments, checking health unit records for information about wells and septic systems if it is a rural property, performing a search of title for surveys or other pertinent documents and so on.  Your REALTOR® and lawyer should be your partner in this fact-finding mission.

8 thoughts on “The Truth About Buying A Property Under Power of Sale

  • Yan Gurevich
    on April 30, 2009

    What a truly Refreshing, if not sobering, summary of the Truth about Power Of Sale. Thank you.

    There seems to be confusion amongst Ontario residents on the concept of Power of Sale vs. Foreclosure. POS is obviously the least costly, least time-consuming and preferred method of resolution in Ontario. But it is not so in all the provinces. Alberta seems to subscribe to the Foreclosure process for example.

    If a Power of Sale Seminar was offered in Collingwood, what suggestions might you make to have a great turnout? Where should it take place and do you think there is a demand for such an event?
    Would you consider running one?

    Thanks again

    Yan Gurevich

  • Marg
    on April 30, 2009

    Hi Yan and thanks for your comment. i don’t know if there would be interest in such a seminar. Let’s ask the readers – any thoughts?

  • Laura
    on March 9, 2016

    I have signed a purchase agreement and put my down payment on a power of sale property. Now the original owner is trying to get it back for the third time. What are his chances of actually getting the house back?

  • Marg
    on March 9, 2016

    Hi Laura. The answer depends on a number of factors including the original charge documents for the mortgage. The owner may have a right to redeem on the property right up until the day of closing if they pay all arrears and fees. Your offer also factors into it – there is likely a Schedule that the lender included that says what happens in this case. As you are unsure, I would recommend that you ask your lawyer for an opinion because it really depends on the documents related to that property. Good luck!

  • Amy Dalton
    on January 15, 2018

    Hello, Myself and company have been in litigation on this issue for a lot of years.. just wondering if there is a short answer to this question. May a corporation put a commercial property into power of sale and then buy the property back at a lower price. All of this with no negotiations with the property owner to reinstate the mortgage. Thanks for your assistance. We are in Ontario court system.

  • Marg
    on January 15, 2018

    Hi Amy and thanks for your question. It is however, beyond my scope of knowledge to answer it and would be an appropriate question to ask your lawyer. Good luck with your situation.

  • Andy
    on April 11, 2019

    Hello…Great article. One question thought: In the property that I am looking at, the lender will not provide nor confirm if the seller (original owner) is not a non-resident as per Section 116 of the income tax. This to me means that if I purchase and if at the time of my purchase the seller (original owner) is a non-resident, then should they owe anything to CRA (personal taxes), it will come back and hunt me down soon or later + I now have to pay 25% on the capital gain of the house. Did I get this correctly and what are your recommendation in a situation where I (the buyer) can not verify if the sellers are in the country or not?

  • Marg Scheben-Edey, Broker
    on April 12, 2019

    That’s a great question and I don’t know the answer 100%. I suspect you are correct and reading the act, it seems to me the line is drawn at the buyer having made “reasonable enquiry” as to the status of the seller. That is tough in a POS situation. It would also depend on what is written into the agreement and the lenders Schedules. I’ve forwarded your question to a local lawyer and will repost when I get an answer.

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