Buying a Foreclosure Home in Canada

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Foreclosed homes are typically homes put on sale by lenders after the previous buyer defaults on their mortgage. Foreclosures are rare and usually happen only when a homeowner can no longer afford their mortgage and fails to sell the home before the lender takes over. Foreclosures are uncommon, and lenders are usually in a hurry to sell the property and recuperate the loss. They can sometimes even sell the house for a price lower than the market price, which could be a good opportunity for potential buyers.

Mortgage defaults and foreclosures can increase due to an increase in mortgage interest rates, with some homeowners no longer being able to pay their mortgages. According to the Canadian Social Survey on Quality of Life and Cost of Living conducted in the Fall of 2022, 35% of the participants reported that their households found it difficult to meet their financial needs over the 12 months preceding the survey. The year 2023 began with much higher interest rates and inflation rates than in previous years. This could lead to a further increase in unaffordability, eventually leading to a higher mortgage delinquency rate.

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After a missed mortgage payment, lenders can legally sell the mortgaged home to recover their losses. Usually, the lender gives the borrower time and some options to get their mortgage payments back on track before proceeding with a foreclosure. Foreclosures are usually the last resort for a lender, and lenders look to avoid this situation as it can be very time-consuming and expensive.

Apart from the legal process, many other hassles are attached to foreclosure, such as auctioning the house or listing it for sale. Many lenders sell such houses for a lower price than the ongoing market prices to speed up the procedure. There are two ways in which homes are foreclosed in Canada, generally depending on the province of the property’s location.

In Ontario, Prince Edward Island, New Brunswick, and Newfoundland and Labrador, the lender commonly tends to have a legal right to sell the home when the mortgagee defaults on the mortgage. This is known as a power of sale, and this process does not require the involvement of the courts. After the sale, any money left after paying the debt, fees, and costs goes to the borrower. They are also responsible for paying off any debt or expenses left over after the sale.

If the home is in British Columbia, Quebec, Alberta, Manitoba, Saskatchewan, Nova Scotia, and the three territories, judicial foreclosure is generally carried out. In this process, the lender approaches the civil court and files a petition seeking a judicial order for foreclosure. This process takes much more time and money than a power of sale. With the court’s order, the title is transferred to the lender, which gives them the right to sell the property. As opposed to the power of sale, the borrower is no longer responsible for the mortgage amount. They neither get any profit from the sale nor are they required to cover any loss.

Advantages

• Foreclosed homes may be cheaper: Lenders generally don’t like to stay stuck up with foreclosures for a long time and look to sell the property quickly. Thus, they might sell the property below market value, saving the potential buyer some money.
• You may be able to bargain: As the lender is usually in a hurry to sell the property, a buyer may be able to bargain and negotiate a better deal if there is no competition.
• No past liens: It is highly likely that the lender or bank has cleared all past liens and paid all the taxes to speed up the sale process.
• Potential to renovate: Foreclosed homes are usually sold as-is, which typically means the owner has likely not undertaken any major renovation before selling the home. This allows the buyer to renovate the property to their taste or to renovate and sell it for a higher price. House flippers are often looking for such properties as they can potentially give a high return on investment (ROI).
• Increase home equity: If you save money on the deal, you can redirect the money you saved for the purchase towards making home improvements that increase the property's value and eventually increase your home equity.

Disadvantages

• High competition: As most foreclosure properties are offered at a lower price than market value, many other potential buyers could be looking for such properties. Thus, the foreclosed home market is often very competitive.
• You may need to pay upfront: The first step in selling foreclosure homes is usually through an auction. Home financing may not be accepted in auctions, and you may have to make the full payment upfront. It is usually tough to find hard money lenders, and even if you do, the interest rate might be too high. Thus, you may only be able to buy a foreclosure home when you have cash available. Before participating in an auction, you should find out if financing will be acceptable if you intend to get a mortgage to buy the home.
• Home is sold as-is: Foreclosure homes are sold as-is, which means that the owner is unwilling to make any repairs or improvements to the home before selling it. This makes the deal risky as there may be hidden issues with the property that may be costly to fix. The mortgage contract’s terms may also absolve the lender of future liabilities.
• Restricted inspection time: The property may not be available for inspection altogether, or you may not be able to inspect during limited hours due to issues such as the electricity being shut down.
• Complicated paperwork and legalities: The paperwork and legalities for such deals may not be as straightforward as common real estate transactions, and the entire process may be longer.

Foreclosure homes may be available at different stages of the foreclosure process and by different types of sellers. Listed below are the potential foreclosure properties you may come across.

• Pre-Foreclosure Homes: These homes haven’t been foreclosed yet but are likely to be repossessed by the lender because the borrower has defaulted on the loan. This might be when the homeowner has been served a notice and is desperate to sell the house to avoid foreclosure. The homeowner will try to sell such a property quickly and might offer a discounted price. However, a lender may block the sale if the price being offered is too low.
• Foreclosure Auctions: The common practice of selling foreclosed homes is through auctions, where interested buyers can place their bids on such homes. These auctions are conducted with the help of third-party auctioneers, and the bidding may start from the amount owed (including mortgage balance and all other fees), as the lender is not allowed to profit from the auction. The bid may also open at a lower amount to motivate bidding. It is noteworthy that the highest bid doesn’t always win.
• Post-Foreclosure: Some foreclosure properties are not sold in the auction and are then sold on the real estate market with the help of realtors. These properties can usually be found listed on MLS listings. There are two main types of properties, real estate-owned (REO) and government-owned.

  • Real Estate-Owned (REO) Properties: REO properties are the ones lenders (such as banks) take over after the borrower defaults. They are managed and sold either by the REO department within the institution or by a third party.
  • Government-Owned Properties: Government-owned properties result from a default on mortgages that the government insured. They are often sold by brokers working on behalf of the government.

Foreclosures are rare in Canada, and you may not be able to find a foreclosed property very easily. One way to find such a property is to contact a realtor who works in the area where you wish to purchase a foreclosure home. Real estate agents know the market and can potentially tell you if there are any foreclosure properties available in the market.

Some websites offer a list of foreclosed properties or ask you to fill out a form to get a list of foreclosed homes. However, you should always get help from a real estate agent or advisor to vet such homes and ensure the listings are genuine.

Buying a foreclosed home is tricky, and there are potential risks involved in buying such a property. The following steps can help you minimize the risk of buying a home that is foreclosed.

• Consult and Hire a Real Estate Agent

  Real estate agents are professionals who are experts in the housing market and can offer you sound advice regarding buying a foreclosure home. They can help you decide if buying a foreclosure home is right for you. Buying a foreclosure home can be much more complicated than buying a conventional home, and having a real estate agent by your side can be very beneficial. They can answer all your questions, walk you through the steps of buying a foreclosed home, and prevent you from making any mistakes. They can also help you find foreclosure properties in your area and help you through the entire process. The seller typically covers the real estate agent’s commission, just like in conventional sales.

• Set a Budget

  A standard step in buying any home is to set a budget. You would generally have to move fast if you want to buy a foreclosure property, and thus it is better to be prepared with the budget and finances before starting the process. When you set a budget for a foreclosed home, you should note that you may have to pay the full amount upfront if participating in an auction. Even if financing is accepted, you would have to put down a deposit if you win the bid. Additionally, you should include the following costs in your budget:

  • Inspection cost,
  • Appraisal cost,
  • Repairs and renovations,
  • Turning on utilities,
  • Land transfer tax and property tax,
  • Cleaning cost,
  • Cost of changing applicances,
  • Cost of furnishing,
  • Administrative fees (Buyer's Premium, etc.)

  There may be other potential costs that the property inspector or a real estate agent could advise you about after looking at the property.

• Prepare for Application

  Preparing for the application beforehand can increase your chances of being approved for a foreclosure property. The following steps can help you:

  • Try to improve your credit score and maintain positive credit behaviour
  • Try to increase your income and maintain a healthy savings account balance
  • If you choose to get the home financed, you should get a mortgage pre-approval so that you know how much you can afford
  • There may be some upfront costs that cannot be covered in the mortgage, and you should set aside some cash for the same
  • Save up for a sizeable down payment

• Find the Right Property

  Once you have your finances in place, you can find properties that fit your budget and expectations with the help of your agent.

• Inspection and Appraisal

  The next important step is to inspect the property to uncover damages and potential issues with the property. As foreclosure properties are sold as-is, you must fix any problems yourself. Inspecting the property can help you understand how much you will have to spend on the same so that you don’t incur unexpected costs later. A property appraisal will tell you the property's actual value, which can help you make informed decisions.

• Make an Offer

  Once you have ensured that the property is worth buying and fits your budget, you could participate in the auction if there is one or make a direct offer through your real estate agent if the property is listed on the MLS.

• Complete the Formalities and Take Possession

  If you win the bid or are approved for the sale, you would have to put down the deposit and complete all the formalities. The paperwork can be complicated, and you should seek legal help to ensure there are no errors. This can be a lengthy process, but it is essential to be thorough. Once all the paperwork is submitted, and the home is vacated, you can take possession. You should note that you may have to get the utilities switched back on and make some repairs before moving in.

Buying a foreclosure home can seem to be a daunting task. Still, you can benefit from buying one if you seek professional counsel and make informed decisions. Potential risks are attached to buying foreclosure properties, and you should avoid buying one without proper guidance if you don’t know much about the process.