Buying a foreclosure can be a great way to secure an excellent real estate deal. A foreclosure occurs when a homeowner defaults on mortgage payments and fails to make the necessary payments despite receiving a notice of default. Once the necessary documents are in order, the property goes up for sale, and the new owner takes possession.
In Canada and the United States, there are similar mechanisms for purchasing foreclosures, but provincial and state laws govern these processes. Those interested in buying foreclosed homes for investment purposes should be aware of the nuances in laws that vary from province to province and state to state.
Buying a Foreclosure in Canada
In Canada, there are two primary procedures for handling foreclosures. The first is called a Judicial Sale, which involves court intervention. The lender must file a case against the defaulting borrower to seek permission to sell the property. The following provinces in Canada follow the Judicial Sale process:
- British Columbia
- Alberta
- Saskatchewan
- Manitoba
- Quebec
In Nova Scotia, it is referred to as Mortgage Foreclosure, but the procedure remains a Judicial Sale since the court is involved.
The second procedure is the Power of Sale, which can proceed without court intervention. Here, the lender takes necessary steps to sell the property if the borrower defaults. This right to foreclose is stipulated in the loan or mortgage documents.
Provinces Using the Power of Sale
The following provinces use the Power of Sale type of foreclosure:
- Newfoundland
- Ontario
- New Brunswick
- Prince Edward Island
Even though some provinces fall under Judicial Sale or Power of Sale, the procedures can vary. Specific steps must be followed in a particular order before a foreclosed property can be sold.
Buying a Foreclosure in the U.S.
In some U.S. states, there is a pre-foreclosure stage followed by the foreclosure stage. Some states use the Judicial Method, others the Non-Judicial Method, and some utilize both procedures.
Real estate investors in the U.S. who specialize in pre-foreclosures and foreclosures find this area of real estate particularly exciting. Banks typically do not like to keep foreclosed properties on their books for long, often selling them at significantly reduced prices. However, caution is crucial when buying a foreclosure; conducting due diligence to ensure the property is free of liens or lawsuits is essential.
A savvy real estate investor pays attention to city hall proceedings, which could be at the town registry, county clerk, or a similar municipal office. When an individual defaults on a mortgage payment, they receive a Notice of Default, indicating that they have not lost their house yet.
Upon receiving a Notice of Default, lenders are often willing to negotiate with homeowners to resolve the payment issue. Depending on the state, this notice typically allows 30 to 90 days for the borrower to address the situation.
If the loan remains unpaid after this period, a Notice of Trustee Sale is sent, indicating the homeowner is about to lose their property. A date for bidding at the courthouse is then scheduled, marking the beginning of the foreclosure process in the U.S.
Astute real estate investors often act before the Notice of Trustee Sale is issued. They monitor public records for Notices of Default and may contact the property owner to offer to buy the property before it goes into foreclosure. This can lead to homeowners selling their properties at low prices just to avoid court proceedings.
In some cases, the investor may allow the homeowner to remain in the house, charging a monthly rent.
Buying a Foreclosure: Take a Closer Look
While buying a foreclosure can be a lucrative investment, the classic “buyer beware” principle applies. Ensure that the property isn’t a “doghouse” or “outhouse.” If a homeowner has defaulted multiple times, it suggests they may not have the financial capability to maintain the property.
If the house is in disrepair but situated in a good location, investors might negotiate a good price. However, be cautious of properties in deteriorating neighborhoods, as no amount of renovation may fully recoup your investment. Renovation costs can also exceed your budget, particularly since auctioned homes have not undergone inspection. How comfortable are you with purchasing a property sight unseen?
Additionally, not all foreclosure prices are necessarily bargains.
Ready to Buy a Foreclosure?
Before proceeding, access reputable databases or foreclosure notice services that maintain updated lists of pre-foreclosures and foreclosures in your area. Some services charge a fee for this information, covering all Notices of Default, Notices of Trustee Sale, and REOs (real estate owned by banks).
If you choose to buy foreclosures, remember to conduct thorough due diligence. Ensure you have all necessary documentation; if unsure, seek professional assistance.
Investors agree that buying a foreclosure directly from a private homeowner is often the best approach. This method avoids court hassles, and as long as both parties agree on the terms, it can be a win-win situation. Although the homeowner may sell below market value, this route eliminates the burden of judicial proceedings.
Auctions for foreclosures are best left to experienced investors. If you decide to participate in an auction, be prepared to do your homework and come ready with your checkbook!
