Irrespective of economic conditions, foreclosure properties are often viewed as a “deal” for the savvy real estate investor. However, courts in British Columbia have a duty to ensure that foreclosure properties are being sold as close to their fair market value as possible. Usually this means ensuring that a property is marketed with a REALTOR on the MLS system. Here are some key points for Home Buyers to remember when they are buying foreclosure properties in Kelowna and other parts of British Columbia:
1. Offer is Subject to Court Approval.
Buying a foreclosure starts much like any other real estate deal, except that often you are negotiating with the Bank, the Bank’s Realtors, and the Bank’s Lawyers. This means that offers must be open for acceptance for longer periods of time to allow the institution’s foreclosure committee time to consider your offer. Unlike a regular real estate deal, just because your offer has been accepted does not mean that “You Have a Deal”.
All deals are subject to court approval. This means that a judge (or master) must approve the terms and conditions which have been agreed to by the bank. The judge will be ensuring that the current home owner has been given proper notice of the proceeding and that they have not “paid out” or redeemed their mortgage prior to the Court Date.
A Buyer should keep in mind that a judge has absolute discretion in her courtroom and success in court can never be guaranteed. The outcome will vary depending on whether the application by the lender for sale of the property is uncontested, contested by the home owner, or if there is multiple offers presented in court.
2. No Other Subject Conditions
The offer which is presented to the Court (and the Lender) must not contain any subject conditions for the benefit of the Buyer. In most real estate transactions, subject conditions allow time for a Buyer to perform due diligence on the property they are purchasing while binding the Seller to the deal (for example: obtain a home inspection). In a traditional real estate deal, if an issue is discovered (ie; a leaking roof) after the deal signed but prior to subject removal, the Buyer will have an opportunity to re-negotiate with the Seller and will not be legally obligated to complete in the face of the new information.
In foreclosure transactions, the Buyer must do all due diligence prior to knowing if their offer will be acceptable to the bank or the court. This means that a Buyer is faced with a dilemma: a) potentially spend thousands of dollars on home inspection costs, appraisal fees, and other consultants only to have the property purchased by another party on court day; or b) buy an “as-is” property without proper due diligence which may have many costly unforeseen complications.
Financing is one area in foreclosure transactions that cannot be overlooked. Once the court approves the offer, the Buyer is legally obligated to complete the transaction and pay the Purchase Price. Buyers must ensure that their mortgage brokers have received an unconditional approval from their lender prior to proceeding to Court.
3. Property Purchased “As-Is”
In a standard residential real estate transaction, the Seller provides a Property Disclosure Statement which provides the Buyer with a modest amount of disclosure on the condition of the premises.
One of the key differences between a foreclosure purchase and most residential real estate transactions is that the Buyer is purchasing the property “As-Is”. In a foreclosure, the seller (Lender) explicitly is making no representations or warranties about the Property and there is no Property Disclosure Statement which is provided (or it is simply blank).
When a Buyer is purchasing a property in “As-Is” condition, the onus is on the Buyer (caveat emptor) to ensure that the property meets the Buyer’s needs. Commonly foreclosure properties have issues including: non-compliance with bylaws, illegal activity, squatters, no occupancy certificates, unhealthy conditions (mold), and very poor maintenance.
The Buyer needs to understand that the condition of the premises may change dramatically between the date of viewing to the date of possession. The Buyer is inheriting all these potential issues, “warts and all”.
4. Be prepared for Court
Once a Buyer’s initial offer is accepted, the Lender’s lawyers will set down a date in Court for approval of the offer. This initial offer becomes part of the public court filing and other parties may show up in court to present better offers. The Lender’s sole responsibility is to set the date for the chambers hearing, if the initial Buyer wishes to have the option of revising their offer in Court (usually in the face of competing offers) they (together with their agent) should attend in chambers on the date. Buyers are well advised to have their “BEST OFFER” ready on the court date (with an appropriate deposit in the form of a Bank Draft) if there are competing offers.
It is important that any offer presented to the court should contain the correct information as the court will rely on the offer to draft the Order Approving Sale which will be filed in the Land Title Office by the lawyers for the successful Buyer. Care should be taken to ensure: Correct Legal Names of Purchasers; Correct Legal Description of All Property; and Correct Description of Property Interest Acquired (i.e.; Leasehold v. Freehold)
5. Closing and Possession Issues
Once you are successful in Court and the Court has granted you, as Buyer, an Order Approving Sale, there are still a number of potential complications. At this stage it is important that you are using the services of a Real Estate Lawyer familiar with closing of distressed and foreclosure properties. Obtaining title to your new home is much different in the case of foreclosure property as there is no transfer filed in the Land Title Office and instead the actual Order Approving Sale is reviewed and approved by a Land Title Examiner. If there have been any mistakes in drafting of the order by the Lender’s counsel, the order may be defected by the Land Title Office and the Lender’s counsel only obligation will be to correct the order.
Possession of a foreclosed property is not guaranteed on the Closing Date. A tenant, squatters, or the former owner may be present on the property. In this case the bank is only required to use reasonable efforts to obtain another court order (writ of possession) ordering the property be vacated. This process can take additional time. A Buyer should not rely on timely possession of foreclosure property.
6. Liability Issues
In summary, Buyers assume a number of additional liabilities when foreclosure property is purchased, including:
a) Property Damage
b) Property Non-compliance with law and by-laws
c) Illegal Activity
d) Adverse Possession of Premises
e) Potential Tax Liability (GST and Non-Resident Withholdings)
f) Potential Strata Assessment Liabilities
Foreclosure property purchases can represent a good deal for many savy and experienced property investors however, Buyers should carefully enter into these arrangements fully educated on the risks of purchasing foreclosure property.
This paper is based on the lecture provided to at the Okanagan Mainline Real Estate Board annual general meeting on March 6, 2013.
Foreclosure Slides Here!
Written by Kelowna Real Estate Lawyer Peter Borszcz.