Power of sale (POS) opportunities are ballooning in the Toronto area and private lenders “are up to their ears in files of defaults,” says a realtor who has handled six cases over the last three months.
Power of sales becoming more widespread
These types of properties are purchased directly from the bank or lender, don’t involve the courts and don’t make any representations or guarantees (as an owner would) on things like zoning and legal use, property condition or boundaries, fixtures, etc.
While POS were rare during the pandemic, “I’m getting more and more calls,” says Steven Sarasin of Re/Max Hallmark York Group Realty in Aurora, as high interest rates cause increasing numbers of homeowners to miss mortgage payments.
A private lender told Sarasin, “There’s another $5 million worth (of POS) coming in a couple of months.”
According to a graph that Toronto realtor Daniel Foch posted on X (formerly Twitter), the number of monthly Toronto Regional Real Estate Board (TRREB) listings that include “power of sale” or “mortgage” in the seller’s name increased from zero at the beginning of 2020 to about 85 in July 2023.
— Daniel Foch (@daniel_foch) October 9, 2023
Realtor Jon Flynn posted a graph on X showing active bank and POS on TRREB have increased by about 10 per cent a month since July and were at almost 150 during the week of October 8. He also found that active bank and POS in the boards surrounding the GTA increased from below 10 during the week of January 16, 2023, to almost 60 during the week of October 8.
Active bank and power of sales on the Toronto Real Estate Board are increasing by around 10% a month since July. pic.twitter.com/4FLuj28VRQ — Jon Flynn (@JonFlynnREstats) October 9, 2023
Most of the POS that Sarasin is working with involve properties that have either first or second mortgages from private lenders. He notes more homeowners who are unable to obtain conventional loans are using private or alternative lenders, despite their high interest rates.
However, a private lender Sarasin works with told him it has slowed on providing mortgages, because of the increasing number of defaults.
“Lawyers are also busy dealing with defaults”, he says. “It is a long process and law firms are backed up,” given the time delays that are required before legal action can commence on a POS.
Time to get creative
“Creativity is sometimes required to sell POS properties”, says Sarasin, who handles many such sales for private lenders. In a few houses he recently sold, private lenders had to invest six figures into the houses to get them into sellable condition to attempt to recoup their investment.
He shares that in a few cases, “We actually had to then go ahead and offer any interested buyers a vendor takeback at a pretty good rate to get them to buy the property.”
Realtor rights and responsibilities
POS situations can raise questions about realtors’ rights and responsibilities. In one POS case in Scarborough, the homeowner – a former teacher of Sarasin’s who has faced several setbacks – hired Sarasin to sell the house.
Sarasin decided to help and spent $7,000 on two large bins and cleaning out a massive amount of garbage. However, a few days before listing the house, the homeowner received a notice stating “the sheriff was coming to kick them out”.
The private lender decided to use its own real estate agent to list the property. Sarasin reached out to the lender, noting that he’d already cleaned the house out and there was still a bin in the driveway.
“They basically said that’s between you and the seller, so you’re going to have to go after them for that.” Sarasin told the lender, “I’ve already got the listing agreement signed, I’ve already had the property cleaned out, I’m local – why can’t we just work together to get it done?”
He hasn’t heard anything back.
Some clients end up in hotels or trailers or worse. “A lot of my clients have sold before they got too far behind (but) they’ve only got enough rent money to go for a year or two,” he points out. Many of these people, Sarasin believes, could end up on the streets.
Be proactive
Sarasin says realtors should be checking in with clients, particularly those with variable-rate mortgages, to see whether they need to speak with a mortgage broker to learn their options before it’s too late. “It’s like everything else – until it actually happens, they don’t think about it.”
Seek advice from experienced experts
Many real estate agents and lawyers contact Brian Madigan, a realtor with Re/Max West Realty Rexdale in Toronto, seeking advice about POS. Madigan practiced law for 25 years before becoming a realtor and has written numerous articles about real estate topics, including POS.
“They’ve usually never experienced it before,” Madigan says, “and don’t know what steps can be taken in a power of sale situation. They’re asking questions like “How can you delay it? What arrangements can be made? What’s the best plan?”
He cautions, “There are a number of very onerous provisions that might be included in a private power of sale from a private lender.”
Madigan acts as an expert witness in legal actions involving negligence by real estate agents. He notes that many “never read the schedule” dealing with POS that private lenders can add to the standard Agreement of Purchase and Sale in Ontario. Schedules used by the Big Five banks are fine, but the schedules from private lenders “can be very risky,” he shares.
Many of the realtors phoning Madigan have never seen the schedule and ask, “Is this something I have to worry about?”
He tells them, yes, it is, “As the schedule could contain a clause making the homeowner responsible for any liens on the house.
What you don’t want to find out is (they’ve) bought a property that’s $1.2 million and there’s $300,000 worth of liens (they’re) stuck with because you didn’t know and you didn’t tell your client.”
Some realtors mistakenly assume the schedules from private lenders contain standard wording, which is not the case. If realtors don’t understand the schedule, they should take it to their office’s broker of record or a trusted colleague, or have their clients obtain legal counsel, Madigan advises.
“I do appreciate it looks like legal gobbledygook, but read it.”
Danny Kucharsky is a contributing writer for REM.
