Judge, Jury, and Executioner – Understanding Foreclosures
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 rid of whomever they chose. Today as we know this term 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 1 year or more before the property actually is marketed as a Foreclosure or Power of Sale property for sale. 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 will also feel 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, or at least this is a short-term solution.
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 to understand your market and having a team (realtor, mortgage broker, inspector, and lawyer) that understands 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 is 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 lenders legal wants, needs, and disclaimers. This document specifies that the buyer is buying the property “As Is Where Is”. The lender is basically riding 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.
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!
To receive a list of foreclosures contact us here or call Randy Dyck at 604-807-4366.
As published in the Real Estate Investment Network’s REIN Real Estate Report July Issue