Is Buying Foreclosures a Good Deal in Canada?

Foreclosure_blog.jpgBy Don R. Campbell

Often real estate investors look at purchasing foreclosed homes in Canada, but are there really deals to be had? What if you plan to renovate and flip it?

A foreclosure is the legal process that takes place when a homeowner can no longer pay his or her mortgage. The bank or lender seeks to recoup monies owed by selling the property, wherein, the borrower loses any financial interest in the property.

The foreclosure system in Canada does not create the extravagant deals that the system in the US does. Although “deals” can be found, it is mostly on properties that have very little interest from buyers. In Canada, ach province has its own system, as well, which makes the process of buying a foreclosed home more complex for buyers. For instance, in BC, the foreclosures go to a public court process where sealed bids are accepted, then all opened at the same time.

Even if a buyer has the highest bid, there still is an opportunity for others to outbid that top bid. This means that a property that has intrinsic value, and therefore interest from a number of buyers, often gets pushed up in value. This is actually an excellent scenario for the lender, as the properties sell closer to market and the underlying loans are paid, thus causing less hardship for all parties.

It is also important to remember that, in Alberta, residential mortgages are mostly non-recourse. Essentially, the consequence is that a portion of those who get in trouble can walk away from the home and mortgage and the banks cannot go after other assets the home-owner may have. This is very different from other provinces. Note that the latest number that has been released regarding ‘Mortgages in Arrears’, which is any mortgage that is 90 days or more behind payments (right up to foreclosure), is only 0.37% of all mortgages. This means that there is NOT a deep pool of foreclosure properties.

As mentioned above, the deal you can get varies heavily by province. It is important to note that the “health” of the underlying housing market of the city that the foreclosure is in also affects the outcome of the selling price. I recommend that you take a look at the history of Tumbler Ridge, BC, a fantastic microcosm of the foreclosure boom/bust/boom/bust market.

Beyond provincial differences, it is also important to remember that the whole system in the US is different from Canada’s. There is more of a fiduciary responsibility on the bank (and the real estate professional they hire to sell the property) to get the maximum dollar. There are not a lot of “short sales” in Canada (i.e. major discounts).

Another question I get asked is, “Are these homes often damaged, missing appliances/fixtures etc., or do they have bad history?” In most cases, the offers submitted for the properties must not have any conditions and therefore you really doesn’t know what you are walking into (i.e. unlicensed renovations, bad wiring, ex-grow-ops, crumbling (yet hidden) foundation or structural issues). I have always been an advocate of reducing risk and, even in the hottest markets, not using ‘unconditional offers’.  

When it comes down to it, you have to have a lot of patience, a lot of time, some expertise on building/renovations, and not be afraid of the bidding process if you are pursuing foreclosed homes in Canada. In some circumstances (especially in slow and underperforming markets) they can provide discounted deals. Purchasing foreclosures is a lot of effort and, frankly, to get the best deals, you really have to be “in the loop” with the right lawyers and realtors, as they control most of the processes for the banks.

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