Foreclosures are formal summary proceedings through the courts, initiated by a bank against a borrower (owner) who is not fulfilling the terms of a mortgage, usually through a default of the mortgage payments. (See Foreclosure Process in Detail for more information.) The vast majority of foreclosures are court-ordered sales, which means the owner still owns the property but the bank (seller) has been granted the right to sell it. To protect the owner’s interest, the courts are involved and are required to approve the sale (including approving the price the property is being sold for).
In the Vancouver Island Real Estate Board area (from the Malahat northward, excluding the Victoria area), typically about 1-1.5% of listings are foreclosures. With the tight market we have tended to be less than 1%, about 25 to 35 depending on the time of year.
You’ve likely heard stories of people obtaining foreclosure homes at astoundingly low prices. While this can be the case (and more often in the US), in Canada homeowners usually are held responsible for any shortfall and the banks can require that the pay the balance. So the court process tends to protect the home owner and their investment, resulting in fewer homes being sold for prices significantly lower than fair market value. In order to accept a price much below the appraisal, the bank must demonstrate to the court a valid reason for the lower price. How it typically works is the bank obtains an appraisal of the property, then lists it a little above the appraisal price. Only if the bank does not receive any acceptable offers after listing it for a period of time will the bank reduce the price or consider lower offers. The bank cannot simply sell the property for the amount the owner owes them, but must attempt to get fair market value, or as close to as possible, to protect the owner’s interest.
Once an offer is accepted by the bank, the offer goes to court for approval, and on that court date anyone can appear and put in a competing offer. This is usually done by having the potential buyers submit one round of sealed bids (though the process can vary), and this may actually result in the property selling for higher than the original offer, or the current listed price. I have witnessed sales at market-price levels, and occasionally even above market-price levels (which is likely due to buyers getting caught up in the competitive process). With Realtors having the automated ability to identify foreclosure listings and email them to clients, often there can be many potential buyers watching a property, ready to jump in when they think the price is right. The unfortunate fact is, the better the deal, the more likely a higher number of competing bids will come in, typically driving the price higher.
To determine if the foreclosure property is good value, you will need to view it to access its overall condition and do some research. I also like to look at the listing history of the home, look at what comparable homes sold for, and do a cost-per-sq-ft analysis. It cannot automatically be assumed that because a property is in foreclosure it is a good deal. Even if it is a good deal, we must determine the maximum price you should pay that would still ensure it is a good deal, in case you have competing offers in court.
There are a few things to consider here. First, if you have a time period in which you need to buy, foreclosures may not be the best choice unless there is currently one available that suits your needs. The foreclosure process can be lengthy and there is no guarantee you will get the home as there could be competing bids on the court date, and the price could also change on the court date. Second, going to court and potentially competing can be stressful and disappointing if you don’t win. Third, there are some unique risks associated with foreclosures that need to be considered. See Is it for me? for more detailed information.
Once the bank receives an offer that they are comfortable with in terms of what they think is fair and that the court will approve, they will accept that offer, subject to court approval. This first offer, sometimes called a triggering offer, can have subject to clauses for the buyer for such things as inspections, financing, insurance, etc. Once the buyer has removed these conditions, then the bank will apply for a court date to receive a court order approving the sale. Upon receiving the court date and location, the bank, usually through their realtor, will release the court date and the amount of the accepted offer. Anyone who wishes to can appear on the court date and put in a competing offer. Competing offers on the court date must be unconditional, no buyer subject to clauses, and must have a deposit. Financing, inspections and other matters the buyer would like to do need to be done before the court date. The court order approving the sale will determine the possession date.
Here is where being patient can be important, but can also work against you. Over time, if an acceptable offer is not received, the property price will likely come down. However, many other people may also be watching the listing, and if the price gets too low it can generate more competition on the court date. It is not uncommon to see a final sale price that is higher than the listed price, which happened 65% of the time in 2016.
While the standard offer of purchase and sale contract is used, it is usually modified. Most sellers banks also attach a Schedule A that modifies the contract. These modifications usually identify that the purchase is “as is, where is”, and limit the bank's representations and warranties on the property, as well as their liability, and state that it is subject to court approval. A property disclosure statement is usually not provided as the bank does not know the property and will not attest to anything about its condition. As with all purchases, care needs to be done to check the property condition carefully.
“As is, where is”, as defined in the seller’s Schedule A attached to the contract, essentially means that the condition of the property when you take possession is the condition you must accept. Further, it means that the bank makes no claims on its condition (good or bad). It is important to note, that when you receive possession it may be in different condition then when you viewed it, and the bank assumes no responsibility for how or when it came to be in that condition. Although rare, it is possible that occupants (owner or tenants), may cause damage before they leave, and may not do much in the way of cleaning. Also, anything that is left (debris or otherwise) will be your responsibility to remove, and if items such as appliances or fixtures have been removed, you do not have any recourse against the bank.
The first offer can have subject to clauses. This means that the buyer can have the normal subject clauses for financing, inspections, insurance, etc. Competing offers made on the court date cannot have subject to clauses as they must be unconditional, except for the seller’s subject to court approval clause.
On the court date, other buyers can present competing offers. These offers must be unconditional (no subject to clauses) and be accompanied with a secure deposit, often $5,000, or as stipulated in the Schedule A. Those competing on the court date must do their due diligence (inspections, financing, insurance, etc.) prior to the court date and ensure financing is in order, as the sale cannot be subject to financing.
If there are competing offers, the standard practice is to have them submitted in sealed envelopes. The buyer with the triggering offer can also submit a new offer if they choose to. The courts have discretion on the process and it can vary; usually the highest offer is approved, but the court may have reasons for accepting another offer. For example, the court may show favour to the buyer who put in the triggering offer, especially if their offer is not much lower than the highest offer. After an offer is accepted by the court, the possession date may be as stipulated in the Schedule A, such as 10 days following court approval, or longer if the home is occupied, or the court may set this date.
Occasionally the owner or tenant is present on the court date and may have requests that the court has the discretion to consider.
The short answer to this is maybe, and you won’t know until you take possession. Through the Schedule A and the offer, the seller will not commit to any appliances being in the home, or to their condition if they are. The court order gives the bank the right and process to sell the property, appliances are not part of the property and the owner can take them if they wish.
In order to buy a home people usually borrow from a lender. The lender is usually a bank or credit union, but can be a person or corporation. Occasionally, some property sellers agree to provide a mortgage as part of the sale. To secure the loan, the borrower agrees to the lender placing a charge or mortgage on the title of the property. The borrower (owner) then cannot sell the property and pass the title onto someone else while the charge exists on the title, similar to a lien but more permanent. Typically, when the owner sells the property, they pay out the mortgage from the proceeds of the sale, and the charge is then removed as part of the closing process. When the mortgage is paid in full, the charge is removed from the title.
If you miss a mortgage payment you won’t immediately lose your house. Banks do not want to foreclose if they can avoid it, and they are often willing to work with you. If your situation is temporary, such as unexpected expenses or lost work or revenue, you may be able get some relief with temporary smaller payments or by refinancing the mortgage. Going to your bank and discussing your situation will likely make the process easier and less stressful. If your situation is more permanent and you have some equity in your home, hopefully the bank will work with you while you go through the selling process. Even if a solution can’t be found, and you are forced into foreclosure, the process takes some time. If you find yourself in this situation, it is advisable to seek legal advice.
Sometimes people experiencing financial stress may recognize the need to sell their home, but are unsuccessful in getting an offer for an amount that will cover the mortgage and selling costs. This could be due to changes in the market, the condition of the home, or to refinancing and incurring additional dept. Although rare, occasionally the lender will agree to a short sale (see next topic).
If you are selling your home for a price that won’t cover the mortgage, you will need to have the lender involved and agree that they will remove the charge on title, otherwise the sale won’t go through and you may be liable for damages from the buyer. A lawyer’s involvement is recommended.
Although rare, a short sale is where the net proceeds from the sale will not fully redeem the mortgage and other costs. The bank may agree to remove their charge from the title if they determine this may be in their best interest. This can take two forms. One, the borrower can make up the shortfall on closing or the borrower and the lender agree to terms to make up the shortfall after the sale. Two, which is very rare, the lender feels the balance owing is uncollectable, such as in a bankruptcy situation, and they may forgive the shortfall.
Banks will normally contact the borrower by phone and mail, following missed payments. If terms for repayment or other solutions are not sorted out in two or three months, a demand is then made on all parties on the mortgage through a demand letter. The demand letter can vary depending on the terms of the mortgage agreement and typically takes one of two forms:
The demand letter may also indicate that a Foreclosure may be commenced after the demand period expires, especially if the mortgage has been accelerated.
If the borrower fails to pay the loan, usually by falling behind in the payments, the lender has the right to proceed against the person and/or against the property. Rights in personam (against the person) may result in a court judgement for the person to repay the loan. Since the borrower has defaulted in payments, in most cases the lender seldom proceeds for judgement solely in this manner.
Almost always the lender will enforce their rights in rem (against the property). This can be achieved in one of two ways, an order for conduct of sale or an order absolute.
Order absolute is where the lender takes title and possession of the property. By becoming the owner of the property the bank becomes responsible for the property including property taxes, insurance and maintenance. Further, all claims against the borrower (for outstanding funds for example) become unenforceable. For these reasons, an order absolute is very rare.
Order for conduct of sale is the most common approach taken by lenders. Here the borrower is still the owner of the property, but the bank has obtained the right to sell the property by way of the order. A more detailed outline of the process is here Foreclosure Process in Detail.
Following is an outline of the foreclosure process, including what a petition is. If you receive a petition for foreclosure it is strongly advised that you seek legal advice immediately. You may have some options, and if you want to file a response to the petition it has to be done within the specified time period at the court named in the petition. The petition moves the situation from a collections issue to a formal court issue, and you will want to have some direction here from a legal expert.
The Petition for Foreclosure is the commencement of the foreclosure process in the courts. After the demand period in the demand letter the following documents are necessary to commence a foreclosure:
The petition and affidavit set out the relief sought and the factual bases for the relief. This includes the reasons for the foreclosure (such as missed payments) and an accounting of the amount owing, with supporting documents. The petition names as parties to the foreclosure all parties liable under the mortgage and all other charge holders to the property (second mortgage, judgement creditors and builders’ lien claimants, for example) and will include tenants if necessary. The CPL is filed with the land title office as a charge on the title of the property.
Once all parties have been served and the time for filing responses has elapsed, a hearing for the application for Order Nisi is held, where the lender sets out the relief sought, including:
The order Nisi is a final order. Any subsequent orders such as Order for Conduct of Sale or Order Absolute are ancillary or supplemental orders.
Order for conduct of sale is the most common approach taken by banks. Here the borrower is still the owner of the property, but the bank has obtained the right to sell the property by way of the court order.
After the redemption period, the bank may apply for an Order Absolute instead of an Order for the Conduct of Sale. If granted, this order will transfer ownership and possession of the property to the lender. As this means the lender would become responsible for the property including property taxes, insurance, and maintenance, lenders rarely seek this avenue. Further, the Order Absolute relieves the borrower from any claims from the lender for any shortfall.
After the property has been listed and the bank has received an offer they believe the court will accept they will apply for an order approving the sale. On the court date other parties can submit competing offers, usually through a submission of sealed bids. The courts, at its discretion, may not approve the sale if it feels the offer is insufficient.
At the hearing of the application for Order Nisi the court will set a redemption period in which the borrower can redeem the mortgage by paying the full amount owed, plus interest, costs and taxes at the time the mortgage is redeemed. The redemption period is usually six months, but is at the discretion of the court and can be shorter or eliminated and in some cases extended.
As long as the proceeds of the sale will cover the amount due on the mortgage, plus interest and costs incurred by the lender, and any outstanding taxes and strata fees, then you can sell your home. Otherwise the lender may not be willing to remove their charge from the title and you will not be able to transfer title to the buyer. In some rare cases the lender may agree to a short sale.
The notice periods set out in the Residential Tenancy Act no longer apply in a foreclosure situation. You will need to adhere to the court's orders and will have to move out by the stated possession date, unless the buyer agrees to allow you to continue renting. The lender will likely also name you as a respondent in the foreclosure action to ensure that the orders apply to you. You will still have to pay rent, though who you pay it to may change. The court order may also set out the times when the property can be shown, with reasonable notice. As a named respondent to the order, you can respond if you choose to. This will ensure that you are kept informed on the proceedings and give you an opportunity to have input regarding the notice period, though it will be at the discretion of the court.