Pitfalls of Buying a Foreclosure Property

Why is that you just don’t see the same deals among foreclosure properties as on TV?

Well, for starters it’s because it’s TV and because the foreclosure examples that you’re seeing as huge opportunities are usually based in the US.

The Real Estate Act in Alberta is 100% different than south of the border and the system is designed to prevent anyone of making a substantial profit at the cost of someone else.

Phase number one of the foreclosure process is called the “Preforeclosure” or the redemption period which could last around 6 months. During this time, the Court of Queen’s Bench provides the homeowner with a chance to make up their arrears and bring their bills into balance. If they are able to this, they can keep their house.

If the homeowner is still in default and assuming that there is sufficient equity in the property, a Judge can trigger a sale and could list the property with a Realtor.

At this point, the property is still in the hands of the Courts, and the legislation dictates that the property is liquidated at an appraised value. Which means, that you are going to be buying it for what it’s worth today!

If it turns out that there isn’t enough equity in the property then the Judge may not even bother putting the property up for sale, they just forfeit the property directly to the bank and then the bank becomes the new owner.

In the next phase (most commonly found) the bank is also going to make an attempt at recovering some of their assets by hiring a Realtor to sell their property. If this attempt proves to be unsuccessful, then the final step is to hand the property over to CMHC to sell.

As you can see, it could take several years by the time a foreclosed property finds its new owner. In every step of the way, an official appraisal report has to be created and based on the report, the property is being marketed.

Due to the strict guidelines, I hardly ever see a property that is a “steal of a deal”. But I guess, it could just be a matter of perspective.

In addition, almost without any exception, all institutions will ask the buyer to give up a lot of control inside the purchase agreement. You can pretty much expect to delete 25% of the standard purchase agreement (parts that normally protect the buyer to guarantee a fair transaction).

If you are thinking of buying a foreclosed property, make sure that you are dealing with a REALTOR® that is competent in his field and provides you with proper advice.

The Risks of Buying a Foreclosure Property

So far,  I have shared with you a general overview of how a property exchanges hands all the way from a defaulted owner to the courts, then to the banks and finally into the hands of a new owner.

Many buyers are surprised to find out that purchasing a foreclosure property involves great risks associated that they may not encounter in a regular resale transaction and the normal rules of engagement do not apply.

It often happens that buyers are competing to purchase the same property and as the natural evolution of any market, usually the strongest bidder walks away as the winner. In a “bidding war” where a foreclosed property is involved, all of the details of any offer received may be shared by the lawyers with the competing parties and it shall become public information.

An even greater concern or risk is the modification to the standard Real Estate Purchase Agreement by the courts or the bank’s lawyer.

In most cases, a Schedule “A” will be added to the purchase agreement to amend many standard provisions and to wipe out most warranties that are in place in the standard real estate agreement to protect the buyer’s interests in the transaction. 

By clicking on this link here, you can download a copy of a PDF sample of alterations of terms that a bank’s lawyer had modified in a previous transaction that I have participated in.

Some of the  most important parts of the contract are often scratched out:

  • Transfer of ownership of any appliances is not warranted nor is their working order.
  • Compliance of a Real Property Report where any concerns related to a building or property line would be identified.
  • Vacant possession of the property will not be guaranteed by the seller. Sometimes they have to evict residents and the bank will not guarantee when it will be completed.
  • There is zero responsibility accepted by the seller for any damages to the property between the time when an offer had been accepted and the keys are turned over to the new owner.
  • GST implications may take place if a major renovation is required. It’s up to the buyer to verify if it applies.
  • Condominium transactions usually involve reviews of detailed financial reports and many other documents to evaluate the financial and structural state of the complex. None of these documents will be provided to the buyer for review.
  • Often there is no opportunity for the buyer to ask for any conditions to be attached to the purchase agreement and they may need to take a leap of faith by making a few major assumptions. For example financing and property inspection.
  • This is something that really blows my mind, but they even cross out section 2.2 of the purchase agreement that states the “The Seller is going to act cooperatively, reasonably, and in good faith”.

As you can tell from the examples above, there is no shortage of risks involved with buying a foreclosure property in Calgary. However there could be some real hidden gems in the pile, but you need to feel comfortable with navigating through a minefield of potential problems. While most foreclosure deals close without a glitch, occasionally they do become a buyer’s worst nightmare.

My caveat to you is that if you are interested in getting your feet wet in the foreclosure market, then you should first consult with a real estate lawyer to get a better understanding of any implications involved with the purchase.

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