Power of Sale

What is the power of sale?

Power of sale is the most common forced sale process used in Ontario when a homeowner fails to repay their mortgage. In a power of sale, a mortgagee (the lender in a mortgage) obtains a legal right to evict residents of a property and sell the property to recover funds owing. After the property is sold, the former homeowner has the right to any profits from the sale after deduction debt repayment and fees.

Buying a power of sale property

It is a common misconception that power of sale properties are sold below their value. In fact, lenders are required by law to take reasonable steps to get the market value for the property.

In a regular home sale, you would probably deal with the seller and their representative. In a power of sale, you deal directly with the mortgagee. This opens up the possibility of you being less in power during negotiation in matters of the property price.

Possible risks when buying a power of sale

Sometimes when a lender takes over a property in a power of sale situation, the property may not be evaluated by the homeowner. It is also important to know that the property is sold “as-is”. In a power of sale situation, the lender is not aware of any defects or problems in the property. Unlike a typical transaction, you can’t ask the seller about the condition of the property or negotiate with them about the repair. Hence, when you agree to purchase the property, it is yours including the defects, and any costs for repairs and renovations will be your responsibility. To handle this tricky business, you should hire a professional real estate agent and consider the option of a home inspection. A home inspection may help identify any underlying problems with the property’s major functioning such as heating and cooling systems, electrical wiring, and foundation. Therefore, it is better to enter into the negotiations knowing everything you can about the property which may even allow your real estate agent to negotiate a better price on your behalf.

Sometimes a lender may allow for a “Right of Redemption”, which means that while you are negotiating for the purchase of the power of sale property, the current owner can make up all or a portion of the payments owed. Thus, canceling the power of sale transaction. Your real estate agent must tell you if this clause is included in the “Agreement of Purchase and Sale” so that you can be prepared for this possible outcome.

There are some legal aspects to consider as well. For instance, if the tenant or the owner is still living on the property, you may have to comply with certain provisions of the Residential Tenancies Act, 2006. You must consult with a knowledgeable lawyer who can help you navigate through such situations.

You should make sure that a title search is completed so that you can identify the true owners of the property and any other liens against the property. Power of sale properties often receive multiple offers, so you may be competing against other potential buyers. Therefore, it’s important to do your due diligence to be sure that you are getting the property in a condition and price that is acceptable to you.

Whether you are an owner or investor, considering the purchasing power of sale property, you need to be aware of all the possibilities and situations involved in such a transaction. Hence, you must have a real estate professional by your side that is experienced in such transactions and aims to protect your investment.