Nov. 29, 2017 | Kathleen Renne
Foreclosure frenzyForeclosed properties can be a bargain for savvy investors that do their homework
CREB® president David P. Brown offers a phrase of caution for those interested in purchasing a foreclosed property: "It's not for everybody. You get a home as is, where is."
One of the primary risks Brown identifies when it comes to purchasing a foreclosed property is that a buyer doesn't receive the same guarantees (e.g., that all the appliances are in working order) as with a regular sale.
"If you're a first-time buyer, and on a tight budget, you could end up with a property in which you have to replace appliances and do a bunch of repairs, and you don't have the money to do it all," said Brown, adding he has dealt with some "very good" foreclosed properties, but also some that are in poor condition.
There are two types of sales involving foreclosed properties: judicial and non-judicial. In a judicial sale, the seller is the Court of Queen's Bench. There are also bank-owned sales, where the house title is in the bank's name.
One main difference between the two is that a seller cannot have any conditions tied to a judicial sale, including such common conditions as home inspections and financing. In other words, a seller must have financing in place and feel confident in a home's condition without an inspector's assessment. In bank-owned sales, conditions on a sale are often permitted.
"In situations where the market is down, a bank can be eager to get rid of a property. Banks might go softer on the agreed price. So sometimes a benefit of purchasing a foreclosed property is the pricing, but not always." - David P. Brown, CREB® President
The easiest way to find out about foreclosed properties is through a REALTOR®, who will be able to search for them on the MLS® System.
One of the presumed benefits of purchasing a foreclosed property is that the buyer is in for a steal of a deal. However, Brown says, in Alberta at least, this is somewhat of a fallacy.
"Alberta has some of the strongest foreclosure laws in the country. Alberta rules dictate that you have to list a foreclosed house at – or close to – market price," he said, adding that appraisers and Realtors lend their expertise to pricing foreclosures.
Brown illustrates another aspect of Alberta's foreclosure laws via a hypothetical couple, the Smiths. If a bank sells the Smiths' property for $400,000, and the Smiths only owe $300,000 on it – having paid down their mortgage – any extra funds left over from the sale, after the bank has taken what's owing and Realtor fees are paid out, must go back to the Smiths.
However, Brown says an educated buyer can often get a foreclosed property for a reasonable price. "In situations where the market is down, a bank can be eager to get rid of a property. Banks might go softer on the agreed price. So sometimes a benefit of purchasing a foreclosed property is the pricing, but not always," he said.
When it comes to a judicial sale, prospective buyers submit their offers to the court. It can take from a week up to several months before the court will set a date to decide which offer to accept. As such, there is no guarantee when a buyer will be able to gain possession of their new house.
"The court wants to get the highest dollar for the property," said Brown, adding that judicial sales are often those in which homeowners have some equity in their foreclosure.
Another risk with trying to purchase a property by way of a judicial sale is that the owner has until the court date to pay the bank the arrears owing. If they manage to do so, the sale is off.
Brown says the profile of the buyer who purchases foreclosed properties changes from year to year.
"Some years, there are more investors purchasing foreclosed homes, which they'll turn into rental properties," he said. "Other years, however, I deal with more people who are moving in to the houses themselves."
However, he notes, one thing does remain constant: "Buyers are more educated when it comes to foreclosures."