I’ve seen a few more court ordered sales (also known as foreclosures) over the last few weeks than I do normally, and have had a few more questions from potential Buyers about the situation and process.
A court ordered sale happens when a home owner defaults on their mortgage payments. After some time, the mortgage lender can appeal to the Courts to force a sale of the property in order to recover any mortgage funds owed. The final offer to be accepted is determined in Court.
Court Ordered Sales (often called foreclosures), are a much different type of purchase and sale than a normal transaction. Court ordered sales are inherently much more risky and take longer than a typical sale, so they’re not for the faint of heart. A lot of people believe that court ordered sales are “deals” that are worth the headache, but they’re far from a guaranteed deal, so it’s not a scenario I encourage for most Buyers.
Here is some information about Court Ordered Sales (aka foreclosures):
1. Foreclosures are marketed like normal properties
The Court will require that the listing agent properly market the home, which includes listing it on MLS and offering showings in order to ensure the best possible offer is received. A court ordered sale is not a happy situation for the owner, so depending on the scenario, it can be hard to get good photos and regular showing times. The ideal foreclosure is one that is vacant where the keys have been surrendered by the Owner, but that scenario is rare.
The Listing Agent will have a document called a “Schedule A” which details information all Buyer needs to know, including required clauses, required dates, etc.
2. Foreclosures are sold “as is where is”
One of the most important aspects to a foreclosure is the fact that the property is sold “as is, where is”. Since the Mortgage Lender isn’t the property owner, they don’t know anything about the property and won’t offer any information or guarantees as to what you will be receiving on the Possession Date. This means that there’s a good chance that the appliances, sinks, toilets, etc, may be removed prior to the Possession Date. The Owner may also be incensed and can cause significant damage to the property as they’re being forced out, which will not be repaired prior to your Possession Date. In addition, the property may have been very poorly maintained, which can lead to other issues like mould, water damage, etc. The Buyer assumes all of these problems.
I’ve seen in some cases that the Owner is still living in the property on the Possession Date, and again, this becomes the Buyers issue to deal with, often requiring that the Buyer get the Supreme Court of BC’s approval to remove the Owner via a Writ of Possession.
I like to tell Buyers: if they are purchasing a detached house in a court ordered sale, they have to assume they’re buying a tear down, and if a livable house is still there on the Possession Date, then they can consider themselves lucky.
3. Offering on Court Ordered Sales
If a Buyer likes the foreclosure enough to submit an offer, they can submit a standard offer, with the addition of a few required clauses, particularly, the “Sold as is where is” clause, and a “Subject to Court Approval” clause. The initial offer can be negotiated by the mortgage lender forcing the sale. Once the initial offer is accepted, the Buyer can proceed with their normal due diligence, though the information provided will be limited. Because it’s a court ordered sale, there is no guarantee that the Buyer will be able to do an inspection or will be provided with any further information from the Seller. The Buyer can still inquire with the City regarding any permits and property information, and should have access to the Strata Documents, but that pretty much the extent of the due diligence you can do. The Buyer needs to be certain that they have enough information to get mortgage financing with an understanding lender. Once the Buyer has removed their conditions (aside from the requirement for court approval), the court process is initiated and a court date is set, typically for a few weeks in advance.
The court date, as well as the accepted offer price, becomes public information, so the Listing Agent will be informing any other potential Buyers of this information and will continue to market the property to other potential Buyers.
The original owner will be notified of the sale and has the opportunity on or before the court date to pay off their debts and cancel the foreclosure.
4. Offers are finalized in Court
The Mortgage Lender forcing the sale needs to prove that the property was properly marketed and that the accepted offer is consistent with fair market value, which is why the Court needs to approve the final offer. If the court decides the property wasn’t marketed well enough, they can deny the sale. On the court date, any number of other interested Buyers can also show up and submit a competing offer, and the original owner can show up to pay off their debts. This means that the original Buyer with the accepted offer may not actually be the one to purchase the property! There is no limit to the number of offers that can be submitted. If there are multiple offers, the original Buyer can submit a new (better) offer.
The caveat is that every offer must be free of any conditions (i.e. a subject free offer), must meet the terms detailed in the “Schedule A” and must include a bank draft for the deposit (this deposit is returned if the offer is not accepted).
The Court will then review every offer and choose the best one. In foreclosures, it’s often the highest offer though the deposit amount and completion dates may be important too.
If the court accepts an offer – it’s a done deal. The court releases instructions that allow the property title to be transferred to the new owner on the agreed upon Completion Date. The Mortgage Lender (and the Strata) are paid what they are owed via the sale proceeds.
Make sure you’re educated when it comes to court ordered sales – you have to be able to submit a subject free offer and accept the property in any state upon Possession. Contact me (778-387-7371 or kristi@realestatevancity.ca) for more information.