10 Easy Steps to Understanding the Foreclosure Process

By Randy Dyck

Judge, Jury, and Executioner—a literal term that originated back in the 1600-1700’s—is a strong, powerful, and extreme way of saying who is in charge. The Judge, Jury, and Executioner have the ultimate power to get rid of whomever they chose. Today, we know this as a figurative term. It is spoken when we feel as though someone is a dictator, or has a non-democratic approach to decisions and leadership.

Foreclosure or Power of Sales to the uninformed may give the impression that the banks or lending institutions are the Judge, Jury, and Executioner; however, the process is far from this model.

Property owners that have missed mortgage payments, or have stopped making mortgage payments altogether, may have up to one year or more before the property is marketed as a Foreclosure or Power of Sale property. The process allows for the property owner to pay their arrears and clean up their financial mess with the lending institution throughout this period; this is far from the definition of Judge, Jury, and Executioner.

Instead, this process is a process of openness and opportunity for the property owner to rectify and reverse the procedure of Foreclosure or Power of Sale. Ultimately, the property owner can show up at court on the eleventh hour and block the sale if they can prove to the judge that they can pay the arrears in full; therefore, resulting in an unhappy buyer as they wave bye to the property that they just placed an offer on.

What’s the difference between Foreclosures and Power of Sales? They are essentially the same; however, different provinces have different terminology and give the lenders different rules of engagement. Ontario, Newfoundland, New Brunswick, and PEI use the term Power of Sale. This allows the lending institutions to exercise their rights without the courts permission or approval. While the remaining provinces have Foreclosures, these provinces need the courts to give the lenders the authority to exercise their rights to foreclose on a delinquent mortgagor.

Why or what is the cause of Foreclosures or Power of Sales? Foreclosures and Power of Sales are the by-product of an increase in unemployment and slumping real estate values. Unfortunately, unemployment brings on financial hardship and in turn, the local real estate market also feels the hardship: softer market, lower values, and less opportunity for the financially troubled to re-finance. This is usually the start of the Foreclosure or Power of Sale journey for financially troubled property owners.

A great example of this was the amount of Foreclosures that entered the market in the US after the credit crisis of 2008. In fact, some areas saw as many as 1 in 4 homes on the market listed as Foreclosures in 2009. However, in a strong market, it is rare to see Foreclosures and Power of Sales. The property owners simply re-finance their way out of financial trouble as property values continue to rise.

What does this mean for the real estate investor?

Risk and Reward!

Remember, a Foreclosure is the by-product of localized higher unemployment and a slumping real estate market. The investor must research the market and understand the drivers and influencers that are the cause of the Foreclosure and Power of Sale properties in the market place. Is the specific market still slumping or is it in the recovery phase of the cycle? Is the investor’s end game fix and flip or a cash flow property? Often, Foreclosures and Power of Sales have been neglected for years and are in poor condition. They may require substantial work to become deemed liveable again. Also, if the market is soft, it probably isn’t a good market to fix and flip.

However, it may be an excellent time for a cash flow property as long as the remedial work isn’t too significant causing an over budget, overpriced property with a poor cash flow model. The key is having you and your team (realtor, mortgage broker, inspector, and lawyer) understand the market and the process.

Market research done, team in place, and a property worth perusing… Now what? Review the history of the property. Was it on the market previously? How many days? What did the property owners pay for it? Dig up what the outstanding balance of the mortgage was and what is still owed on the property. This can be found on the Conduct of Sale paperwork, or by pulling the mortgage documentation off of the title search.

This informational can be very helpful in your negotiations.

However, just because the outstanding balance is X, doesn’t mean the lender will sell it for X. Sometimes the sale price is well below X, and other times, it may be well above X. It could also hinge on it being an insured mortgage with CMHC or Genworth. In most cases, an insured mortgage is the responsibility of the lender to market the property for roughly 90-120 days. They will generally adjust the list price every 30 days as they are motivated to get this property out of their hands. If it is not sold in the 90-120 days, it then goes to the insurer, CHMC or Genworth, at which time it becomes their responsibility to sell it at whatever cost.

This is often where the best foreclosure deals can be found.

In the end, the list and, more importantly, the sale price are based on market condition and a current appraisal.

You’re a willing and able buyer—time to prepare and negotiate the offer. The written offer is very similar to a re-sale offer. The buyer/investor will have the regular subject clauses on the offer (financing, inspection, title search, etc.). The offer is submitted and negotiated with the seller; however, in this case the seller is the lender. Upon the offer being accepted, and the removal of the subjects, it is now a firm deal – well, almost firm – as it is still subject to court approval.

In a typical re-sale offer, once all subjects are removed, the deal is firm and the buyer knows that on completion date, the property is his or hers.

The most significant difference with a Foreclosure is the following: a schedule that outlines the lender’s legal wants, needs, and disclaimers. This document specifies that the buyer is buying the property “As Is Where Is.” The lender is basically ridding itself of all liabilities and gives no warranties or guarantees regarding the property and improvements. What you see is what you get when you open the front door on completion day.

And, of course, the final subject: subject to court approval. This is where much of the mystery and confusion exists around Foreclosure and Power of Sale deals.

Here are 10 easy steps to understanding what happens once the offer is accepted and waiting for the court approval:

1. You have a firm deal in place with the lender—deposit has been placed in the Realtor’s office trust account.
2. The lender requests a court date to approve the sale. Usually the court date is 2-4 weeks after the request by the lender’s lawyer.
3. The property can still be shown while waiting for the court date by other prospective buyers. They will also have the ability to know the accepted offer price that you negotiated with the lender.
4. If another buyer is interested in the property and is willing to offer more, they have the opportunity to compete against you and your accepted offer in court.
5. If there are no competing offers on the court date, and the property owners have not paid the arrears in full on the eleventh hour (very rare, but have seen this happen), the judge will review the file and approve the sale.
6. Upon another buyer, or buyers, submitting competing offers in court, the buyer must have a subject free offer, deposit check by bank draft, and be ready to close within 10-30 days.
7. The competing offers are put into individual sealed envelopes (sealed bid process). The original offer may change, improve, or leave the offer as is, and resubmit as well. The judge will open all sealed bids and deem which is the best offer for the lender.
8. Price, completion date, and deposit will dictate which of the competing offers the judge will approve.
9. Upon approval, the process of closing is similar to a re-sale completion.
10. Note: make sure your correct full legal name, contact info, and how you want the property registered is on the purchase and sale contract. Once the courts have approved the contract, it cannot be changed by going back through the courts. Instead, it’s an expensive process for a minor change that the buyer will be responsible to pay.

Are you prepared to be the Judge, Jury, and Executioner on a Foreclosure or Power of Sale property?

Surround yourself with a strong and knowledgeable team: your jury. Execute and negotiate the right deal and have the judge approve your offer in court!

Randy Dyck has been a top producing realtor in the Fraser Valley since 1992. He and the Eximus Real Estate Team have sold over 3000 properties in the past twenty years. Randy and the six agents of the Eximus Team serve investors in Chilliwack, Abbotsford, Mission, Maple Ridge, Langley, and Surrey. Randy personally invests in Multi-family, Commercial, and Development properties. Contact him at randy@eximus.com.