by Jon Lumer
Everyone in Vancouver is looking for a deal. Rental rates are jumping to catch up with the sharp increase in property values and many tenants (as always) are looking at home ownership as a way to avoid paying rent to their landlord and start paying it to themselves, or at least their lender. Meanwhile, investors made dizzy by the capital appreciation they’ve witnessed in Vancouver over the last three years are desperate for a piece of the action or hope to expand their current holdings.
Many of these potential buyers, be they first-time homeowners or investors, believe that picking up a foreclosed property could be their ticket to good value and an otherwise unachievable square footage in the neighbourhood of their choosing.
Is this a reasonable strategy? What are the potential pitfalls? What exactly is a foreclosure anyway?
A foreclosure usually occurs when an owner defaults on the mortgage payments to their lender and the lender decides their best option is to seize the asset that was mortgaged (the house or strata unit), sell it under the authority and supervision of the courts, and pay themselves out from the proceeds of that sale. The owner of the property is still entitled to whatever is left once all claims against the property have been settled.
Does this make foreclosed properties vulnerable to low bids? Not necessarily. In fact, the system is set up precisely in order to ensure that fair market value is paid for the property and the owner is not getting less for the home than what they should reasonably expect.
Once the court has authorized the lender that has foreclosed on the property to place it on market, a REALTOR©, acting for that lender and not the owner, will market the property while keeping good records of her efforts, market conditions and comparative market analyses, as well as any showings that result from the marketing.
If a bid is received that the lender accepts, a court date will be set. The lender will not accept a bid far below market value for the property, as they know the court is unlikely to allow such a sale to proceed, and the court has final say on the matter. This first bidder may negotiate with the lender and may submit a “subject offer,” but the terms of the contract are destined to be largely unfavourable to the buyer.
Why is that?
Foreclosed properties are sold “as is, where is.” That means the buyer has no recourse if they are unsatisfied with the state of the property on possession. There will be no guarantees regarding any chattels, or even fixtures, the buyer may have seen while viewing the property. The danger of receiving the property in a sorry state is particularly acute if it is not vacant. This is quite different from the scenario most buyers will face when negotiating (through their agent) directly with the owner of a property.
The first accepted offer price will become public knowledge. Any interested buyers may now inform themselves of the value of that initial offer and present themselves at the court date to present their own offer. They must bring a bank draft for deposit if they are hoping to have their offer accepted. If their offer is selected and they do not have a bank draft, the offer will be rejected and another chosen. The court selects the best offer after having received all the sealed bids. There are no second opportunities once a winning offer is selected. The offers must all be subject-free. The person who made the initial offer which triggered the court date is also entitled to better their own offer at the same time other offers are being submitted. The values of all non-winning offers will remain undisclosed.
As with any multiple offer situation, the presence of many buyers encourages all buyers to increase their bids. This increases the likelihood that someone will pay at least market value for the property and quite possibly above-market value. The fact that everyone is physically present in a jam-packed courtroom should likely reinforce this tendency to increase one’s bid in the presence of competing offers.
What if there is only one offer?
In the case that there is only one offer, necessarily the initial accepted offer, a buyer may feel he is entitled to acquire the property even if his bid seemed quite low and he was surprised the lender accepted it. Not so fast. The court will still need to authorize the sale. In order to determine whether the sale is permissible, a few questions will be considered. How long had the property been marketed? The longer the marketing period, the less likely it is that higher bids will be forthcoming if the court does not authorize the existing contract. How many times was the property shown? If dozens of people have seen the property and only one has made an offer, it increases the likelihood that this is the best offer the owner could expect. How far off is the sale price from the assessed value? If the sale price is well below assessed value, this will appear suspicious, and further justifications may be necessary before the court consents.
This demonstrates that foreclosures are not necessarily quick or easy routes to acquiring property affordably in Vancouver. Some aspects of the process actually make it less likely that a buyer will find a true bargain in foreclosures.
Naturally, there is a great deal more to be said about foreclosures and I invite you to contact me if you have questions about these types of transactions or any other real estate related inquiry.