A blog cannot deal with all aspects of a subject and is not intended to replace professional advice. It's purpose is to highlight information and identify areas of possible interest. Anyone wishing to discuss this blog or to make any comments or suggestions about this blog is invited to do so by either posting comments or emailing me directly.
Last Monday, 30 of the top REALTORS® working the Calgary area attended the Advanced Foreclosure Course for Real Estate Industry Members at the Calgary Real Estate Board.
The course was led by Lubos Pesta and Gary Befus – both real estate lawyers with significant experience in foreclosures and the foreclosure process. They both made the statement that echos our view, "Foreclosures are not for first-time buyers."
Prior to the session beginning, I commented how many real estate agents in the city still confuse Bank-Owned sales with Foreclosures. The instructors made it clear to the group that Foreclosures are a legal process whereby the bank or other creditor petitions the court to offer a property for sale. The court is considered the Seller in a foreclosure action. When a foreclosure is complete oftentimes the bank becomes the new owner and in turn will begin the process of selling the property. This sale (by the bank) is NOT a foreclosure, but is simply another sale by a seller similar to anyone else. The confusion is that banks are using a form of "Schedule A" that the court uses to limit their liability and risks.
It was clear from the group that quite a good number of the general population does not make the necessary distinction.
What is the court's role?
The court's role is to get the original seller the best price they possibly can and to prevent the creditor from aquiring the property unfairly. Their role is pretty clear. The creditor (or bank most often) is required to produce an appraisal to the court of what the property is worth. Now this appraisal should indicate that the property is for the purpose of sale under distress. This will clearly lower its value. Also, the Schedule A provides clear disadvantages to any potential buyer.
What are the limitations of the Schedule?
There are several: It is detailed clearly in the Schedule that there are "no warranties or representations." Everything is As-Is, Where-Is, There will be no Real Property Report provided. There will be no providing of Condominium documents or Estopel Certificate for condominium properties. Further, no chattels are included (appliances, etc.) and any that are within the home have no guarantee of title.
So what are the ramifications of that?
Firstly, without the Real Property Report or compliance certificate there could be HUGE costs to rectifying issues that would otherwise have been the Seller's responsibility to rectify. Things like a garage or retaining wall inappropriately placed on a utility right of way. Or a home that was situated on top of the property line. Some say that the purchase of title insurance will provide the protection to rectify any deficiencies. Well, in fact, that is not the case. Title insurance firms are now stating that by crossing out the protections in the purchase contract that this voids their ability to sue the original seller for their losses. As a result they are now not paying on claims for these specific reasons.
As-Is, Where-Is means that if the roof is leaking or the furnace doesn't work – it's for the Buyer to fix. The standard purchase and sale transaction requires that everyting is in livable and working order on completion day and if it is not, the Seller is responsible for the repair. Further, there may be a warrantee period as per the Limitations Act.
For condominiums, the lack of the financial statements, board meeting minutes and engineering reports are a huge risk. The lack of the Estopel Certificate will also not provide the assurance that the previous owner has paid up their condo fees or special assessments.
IF the property had been previously uses for a business, or if the bank foreclosed on a developer and the property were new, the buyer may suddenly find himself on the hook for GST payable or Capital Gains Tax if the owner were a non-resident of Canada.
In the typical real estate transaction, there are conditions permitted within the contract such as financing, home inspection, condominium document review, etc. This is not the case for foreclosures. The sale has none of these protections.
There is also the situation that could happen that the original owner doesn't vacate the property when they are ordered to by the court. Then there would have to be an eviction which could potentially delay possession for weeks, months or years. There could be significant damage to the home in the meantime, which again, would be the Buyer's responsibility to repair.
As we all know, risks equate to money. That is the reason for the appraisal with consideration that it is being sold under duress. These are tremendous risks for any buyer and need to be reflected in the property value (downwardly).
Are there many that would take up these risks? Sure. But they need to have the ability to rectify all the issues. This is not the domain for most buyers.
So Foreclosures are exceptionally risky. What about bank sales?
Banks and other lenders are now regularly requiring their own customized Schedule As. They do allow conditions in their purchase contracts, but they have these risky schedules that limit their liability. When the bank takes possession of the properties, they are vacant.
Are they somehow mandated to use Schedule As?
No. They use them because people accept them.
So bank sales are risky too?
Yes, but to a lesser extent. You can have conditions – especially a financing condition. Also, the property will be vacant. Both of these allow great comfort. Unfortunately, there is that Schedule A that states no Real Property Report and no the necessary compliance certification. No Estopel Certificate. To me, these are huge risks.
Obviously the risks should be reflected in the purchase price and often are. This is one of the reasons why bank sales (and especially foreclosures) are not included in establishing market value on a typical home. Unfortunately, once the home is sold it is often difficult for appraisers and real estate agents to know if a past sale was a foreclosure or bank sale.
Banks are also wise enough not to try to liquidate all of their owned property at once. Having too many distress sales on the market at one time would lower the potential selling prices in a neighbourhood. That in turn could cause a cascade of more foreclosures.
I wouldn't recommend a foreclosure for the vast majority of people. Bank sales on the otherhand, can provide an opportunity for an investor. Just don't pay "market value" for a home that has the huge risks attached via the Schedule A. Know what you are buying and get expert advice.
As always, these comments are not providing legal or tax advice. They are merely provided so that you can ask the appropriate questions of your own legal and tax advisors. Clearly, what you don't know can hurt you – severely!
I came across an article about foreclosures in today's edition of the local newspaper online: http://shar.es/fjnFH The article itself is pretty good and details some of the risks, but it greatly misrepresents the number of foreclosures on the market today. As of this morning there were, in fact, only 59 foreclosures listed for sale on the Calgary MLS® System within the city. The balance of the number this agent reported (144 as of today) are actually "bank-owned sales" (i.e. post foreclosures). These are also known as "REOs" in other jurisdictions (Real Estate Owned). This is a common mistake, but banks, and other creditors that have taken property through a foreclosure action, are just like any other seller. But, as I indicated in the original post, do request a "schedule A" (with some of the similar restrictions/risks imposed by the courts) to be included with the offer to purchase. Whether or not the buyer is willing to take those risks will depend upon the amount of a deal they can get on the property. Keep in mind the foreclosure action is a process to protect the debtor/seller from being unfairly treated by the lender/creditor. Once the foreclosure is complete and the title has been transferred to the bank (or other creditor), then their role is to get the highest price for themselves - and in many cases have the ability to sue the debtor for the shortfall - PLUS expenses.