The foreclosure process can seem very intimidating and there is often a lot of unnecessary fear involved. I am here today to tell you that it is not all that scary, in fact, it can be one of the best real estate choices you can ever make.
Now, it is not for everyone. I usually do not recommend that first time buyers purchase a foreclosure because of the emotion that goes along with your first home purchase. There is very little else I dislike in my job more than watching a first time home buyer get outbid at court on a home they grew emotionally attached to. If you feel you are savvy enough, read on…
In BC, court order sales begin with any lender/respondent who holds a mortgage on a property applying for a petition of sale. This process begins by one of the parties who provided money to the property owner in the form of a mortgage sending a demand letter requiring payment. This is usually a result of the property owner not paying their mortgage payment. From there, the Order Nisi process begins and gives the home owner a period of time (1 day to usually 6 months) to pay the mortgage in full (known as the redemption period).
If the home owner fails to pay in full and the property does go to court for sale, the lender will get all the money owed to them on the mortgage plus legal fees, interest, costs and taxes. Any money above what is owed will actually go back to the home owner. EG.
Dick and Jane own 1234 Sunset St. They have a mortgage of $500,000 from ABC Lending. They have been skipping payments and ABC has filed for the petition of sale. The property sells at court for $625,000. There are $25,000 in interest, costs and taxes owing from the process so:
1. $500,000 to ABC Lending
2. $25,000 to ABC in interest, costs and taxes
3. $100,000 goes to Dick and Jane
If there is a loss, the lender takes it as a loss and can sue for the difference from the borrower…
When you are buying a foreclosure it starts out with you writing an offer, you negotiate the offer with the lender/bank and if it gets accepted you then begin the process of removing or satisfying your subjects (financing, inspection, title search, insurance, court approval), you will also be asked to sign a “Schedule A” which is a long winded version of “You are buying this property as is and where is”.
Once all subjects are removed, the lawyers for the lender then submit for a court date and you the purchaser have to wait for that date to come. In the meantime, I always suggest to my buyers to speak with their lender about getting additional funds to increase their offer on the day of court… and here is where it gets a little complicated.
On the day of court, anyone can show up and write an offer on the property. Their offer will be no subjects and they WILL KNOW what your original accepted offer price was.
EG. You write an offer on Dick and Janes property for $550,000, the lender counters with $650,000 and back and forth you go until you both agree to $625,000. Now, anyone coming to court on the day of the foreclosure will know that you have an accepted offer of $625,000. So you should know they already have a higher bid than you and you should be prepared to bid higher (how much is up to you).
The judge will ask if there are any other offers, the lawyer will submit the additional offers (sealed envelopes) from all parties that came to court as well as your adjusted offer. The judge will then open them up and will usually choose the best offer based on the following:
1. Highest Price
2. Largest Deposit
3. Quickest completion date
There are two types of foreclosures in BC, Order Nisi and Order Absolute:
Order Nisi – This is the most common. Starts the foreclosure process and the lender is granted permission by the court to sell your property with the REALTOR® of their choice. You still owe the lender money if it sells for less than you owe on the mortgage.
Order Absolute – The lender takes over title of the property. The previous home owner is asked to leave. They do not owe the lender money anymore. These are rare because they offer no recourse to the lender. If the house sold for too little they are left with no way to sue for the outstanding amount. With an order Nisi they can still sue for the amount owing.
This is the ‘nitty gritty’ of the foreclosure process. If you would like more tips on how to ensure you are successful buying a foreclosure let me know as I am happy to help. I have over a 98% success rate with buyers on foreclosures.