With property listings remaining on the low side pretty much across the country, power of sale (POS) opportunities may be a great option for your buyers if they’re made aware of red flags and how to make educated purchases.

Matthew Gibson, a real estate lawyer with M Gibson Legal based in Hamilton, Ont., has witnessed a significant increase in POS homes on the market, including multi-million dollar properties. 

“In 2021, my practice used to get one to two new power of sale actions per month, and most of them would get resolved by refinancing within a month or two,” Gibson tells Real Estate Magazine. “Starting in October 2022, we were getting seven to 10 actions per month, and many more of them are going all the way to sale by the mortgagee.”

Gibson equates this increase to a combination of higher mortgage rates and declining property values that are seeing more owners struggle to refinance and pay out a defaulted mortgage while, at the same time, lenders are acting faster on delinquent mortgages due to declining property equity.

How does a power of sale work?

POS properties don’t typically involve the court system (which is unlike a foreclosure). The lender has a right to the property when it goes into default – whether through non-payment of mortgage(s), insurance and/or property taxes. 

The situation is remedied by the lender selling the property and collecting what’s owed on the mortgage. Any money left over after paying all outstanding mortgage debt goes to the borrower. 

This means that the property is being purchased directly from the bank/lender – referred to as the ‘mortgagee in possession.’ The mortgagee in possession won’t make any representations or warranties like an owner could on such things as zoning and legal use, property condition or boundaries and chattels and fixtures. 

It’s important to know that the process and laws regarding power of sales can vary between provinces in Canada.

Proceeding with caution

Danica Milich, a sales representative with Re/Max Jazz Inc. based in Ontario’s Durham Region, agrees that POS properties can be a great opportunity for your buyers who understand what they’re purchasing. “You are buying the property as is. No warranties! You need to proceed with due diligence as your top priority,” she warns.

Another cautionary point is that, right up until closing, even with a firm offer, the owner may be trying to get their house back by redeeming the mortgage – paying arrears, fees and principal or bringing it back into good standing, depending on the lender requirements. “This is rare, but it can happen,” Milich told REM. 

This is why the buyer’s agent needs to ask the seller’s lawyer and agent if they’ve been in contact with the owner, says Gibson. 

Have they been trying to sell or refinance the property themselves? How many mortgages are on title? Is this their family home? Do they own other properties? 

In addition, having a shorter closing date after due diligence is completed is also beneficial, says Gibson, adding that the buyer’s lawyer should contact their preferred title insurer and seek “insure over” coverage for specific issues, including unpaid owner debt that may form a lien; property taxes/municipal charges; and boundary/encroachment issues for which the seller may not be aware (no survey).

Top red flags

The two biggest red flags realtors need to be aware of when involved in the purchase of a POS property pertain to tenants and vacant homes, says Gibson.

Getting rid of tenants on purchase can be an expensive and time-consuming process, particularly with the Landlord Tenant Board currently being backed up almost a year.

If the property is vacant, it’s important to determine a timeline. Vacant properties may have been cut off from utilities for months, which can cause significant damage (e.g., broken pipes). Vacant homes can also be targets for thieves ripping out copper, etc. This is where a home inspection is vital to ensuring your buyers understand the property’s condition.

Benefits to purchasing POS property

Gibson points out three main perks to buying POS property:

Price: The mortgagee has an obligation to obtain a fair market value price for the property, but your buyers will be competing against a smaller pool of potential buyers and purchasing as-is, which means they’ll likely get a good deal.

Opportunity for hands-on investors: Many POS properties were initially purchased by flippers/investors and weren’t completed for a number of reasons (cash flow, too many other properties, etc.). A hands-on investor who’s willing to put in sweat equity can pick up a property and get it ready for resale/rental fairly quickly.

Flexibility: Many private lenders are interested in keeping some or all of their investments. This means they’re often open to alternative financing deals, such as offering a vendor take-back (VTB) mortgage on the sale.

Top takeaways

1. Get a lawyer involved early and often. Before an offer is even made, the lawyer can do title and zoning searches, look for bylaw notices on title, etc. 

2. Protect your clients by putting conditions in place for a home inspection and financing and a due diligence clause to buy time while the state of the property is being determined.

3. Be aware that the POS property is being purchased as-is and where-is, which means there is very little to no recourse against the mortgagee in possession if anything is missed that becomes a problem for your client. 

4. Ask as many questions of the selling agent/seller’s lawyer as possible.

5. If the deal seems too good to be true, it probably is.

POS properties can offer your buyers extra opportunities as long as they do their due diligence in ensuring the home is a worthwhile investment and that none of the cautionary measures mentioned above will pose significant problems.

Cindy Freiman

Cindy Freiman is the owner of Creative Soul Communications. A journalist by trade, she’s passionate about helping businesses grow by creating top-notch educational and thought-provoking content for social media, blogging, client/referral partner communications, marketing and advertising. Cindy has specialized in mortgage financing and real estate for the past 17 years.