I had a client say to me the other day, “This listing is a foreclosure. What does that mean? Tell me about foreclosures.” I have worked with clients to buy foreclosures. This type of transaction for first time buyers can be very risky and stressful.
Can there be opportunity when buying a foreclosure? Yes, but you are going to want to have some experts such as realtors and builders/contractor to help you with the process. A savvy buyer will also want to have a capital reserve to deal with the possible damage that will likely have been done to the property and be ready for a lot of work to get the property back to a regular living condition. It will be a long and hard process and for some at the end of the day it pays off, but for many it is not worth the trouble. This type of purchase is not for the faint of heart, or typically for a first time buyer either.
Foreclosure offers are expected to be “unconditional offers” (i.e. “a subject free offer”). Of course the buyer can always complete their “due diligence” in advance of making an offer, by going ahead and arranging for pre-approval on financing, inspection and in the case of a condo, even pre-reading all the documents (Minutes, Budget, By-laws, Rules…and so on). This type of buyer needs to know there are no guarantees the bank will accept the first offer declared at court, so one may be spending time on a deal that may not go ahead. This is the case when additional and more competitive offers are provided in court. There is no requirement to give any advance notification if there is more than one offer.
Buyers should be aware there is no negotiating with the “owner” as the ownership in a foreclosure has now become the bank or creditors. The bank/creditors are expecting an “unconditional offer” because their bottom line is the recovery of their capital. To buy a foreclosed upon property, the buyer decides upon a “price,” and then actually negotiates with the bank in advance of the deal going to court. Once there is agreement on price, they will submit your offer to court for approval. Once the offer is submitted to court everyone else knows the price of your offer because it is now public record. Typically this should not be your best or final offer, as explained following, as the process gets even trickier!
Again once the buyer has gone through all of this due diligence, and arrived at this point, another purchaser may offer more! Anyone is allowed to come to court and offer on the property, since the courts wants best value for the creditors as possible. Often the buyer will likely have to make a second “blind” offer, which will be above their first offer, if someone else bids on the property at a rate higher than the first & original offer. It is very challenging to know what to offer in this case because they are all sealed bids. Again another reason to have a seasoned realtor guiding you!
Furthermore, even if there are no other offers (i.e. meaning you and the creditor pursuing the foreclosure action already agreed on a price), in Canada, the Foreclosure Court judge, called “The Master,” may disallow your offer if it is deemed too low or unreasonable, as it is the courts job to protect the overall position of creditors. It is not like in the USA where there are tones of “good deals.” The Canadian courts look out for all the parties’ involved, not just the group that enacted the foreclosure proceedings. This process is a reasonable check on values to safe guard creditors as reasonably as possible.
The whole transaction is very fragile from the point of view of the potential buyer who can be shifted out of the process very easily. As if that is not enough, there is even more risk! The buyer takes the property: “as is, where is.” In some cases the creditors or previous owners will have sold off the appliances, sometimes even the toilet! Yes in a foreclosure, the court is selling only the realty, not the fixtures! Moreover, the previous owner may have chosen to garner retribution at the “unfair” world. This for example could mean … tossing a can of paint across a room, or flushing a bag of concrete down the toilet and you can bet that they will not have cleaned up before they left. So typically the expectation is to receive possession of the property in a degraded state. As well, in some cases the former owner may not have vacated. A bailiff may have to forcibly remove them from the premises and change the locks.
Now going back to my conversation with my first time home buyer, she decided to continue looking at other properties…which I would typically recommend for most of my clients…That is unless the client is really keen to work through the foreclosure process and have the means, time and ability to manage the risk involved.