Dennis Philps

One of the biggest urban myths that is widely circulated among the real estate crowd is that foreclosure properties are available at severely discounted prices.  Granted there are a growing number of foreclosure properties available for sale with probably a steady stream of them yet to come.  But the reality is that these properties are placed on the market by the lending institution at their perceived market value.  Any price reduction will normally be unavailable for the first 30-45 days or more.

There are some very important considerations to bear in mind when placing an offer on a ‘foreclosure’ or ‘judicial’ listing.  The risks are much greater than in a normal real estate transaction:

1.  Did you know that these homes are normally sold to the highest bidder in an open-ended bidding process/

2.  Did you know that once an offer to purchase is made to the courts, it becomes a matter of public record and open therefore to all other potential buyers who may not submit a higher offer to negate yours?

3.  Did you know that the ‘offer to purchase’ you must submit places most, if not all of the risk, on your shoulders?  The property is being sold on an ‘As is, where is’ condition.  For example, the purchase contract you must submit must be accompanied by a ‘Schedule A’ or ‘Schedule B’.    Accordingly, the bank or the court will eliminate from the standard contract any obligation to provide a Real Property Report (where applicable), to deal with any existing property location problems known or unknown, to ensure that all appliances are in normal working order on possession day (In fact, the seller will not warrant the ownership of the appliances and the new buyer may see them repossessed even after taking possession!), to provide vacant possession on Completion Day (The sheriff may have yet to evict them!), to assume responsibility incurred on the property between the time of making the offer and gaining possession (making offers sight unseen is not uncommon), to pay any applicable GST that has not yet been paid (for extensive renovations done by current owner), or, in the case of a condominium, to provide an Estoppel Certificate or pay for any special assessments levied after the submission of the offer?

4.  Did you know that unconditional, cash offers are the only ones given serious consideration?

Now, if you still are determined to buy a foreclosure, it is strongly suggested that you get legal counsel to assess your risk and obligations BEFORE the offer to purchase is submitted for consideration.    The risk to you is enormous!

In most cases, bargain hunter’s would be advised to look for a ‘motivated’ seller out on the open market where the risk factor decreases dramatically.  Buyer’s clauses like ‘subject to satisfactory financing’ and subject to ‘a building inspection by a qualified inspector satisfactory to the buyer’ are normal and expected.

To be forewarned is to be forearmed!  Please note that these ideas have largely come from the pen of ‘Legal Lou’ Pesta, a well-repected real estate lawyer in Calgary!

Jim Flaherty, Federal Finance Minister, announced some significant changes coming March 18, 2011 and April 18, 2011 [HELOC] to existing mortgage lending rules:

• Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
• Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

Edmonton home buyers take note particularly of the reduced amortization period.  Take the following example as a guide.  A $150,000 mortgage at 4% interest amortized over 35 years requires a monthly payment of $661.20; spread over a 30 year period, the payment becomes $713.28.  In other words, the payment increases by $52.08 per month.  Reducing the payment period to 25 years [and saving yourself ahuge amount of interest payments] would require a monthly payment of $789.03.

If you are thinking of buying this year and you would like to take advantage of the lower payment structure, ACT NOW!