Sunday 12 January 2020

Are power-of-sale listings a good deal?

I sometimes see ads for lists of power-of-sale properties, aiming at investors and home buyers looking for that 'steal of a deal'.  Unfortunately, you might be surprised to learn that a power-of-sale property is not automatically the great deal you are looking for.  One needs to understand the process to understand why.

First, we need to clarify that a power-of-sale is not a "foreclosure" even though the typical person will use the terms interchangeably. 

A foreclosure is when the bank takes a property back for non-performance of mortgage obligations (usually payment), and the property ownership is actually changed to the bank's name.  The property belongs to the bank when it is sold under foreclosure, and in a true foreclosure situation the bank may undervalue the property to get rid of it and recuperate their costs as quickly as possible.  But the legal process for a foreclosure is different from a power-of-sale and with different timelines and obligations.

If you're not paying your mortgage, the lender has another option called power-of-sale, and it is a fair bit more common in the marketplace than an actual foreclosure because the latter is more difficult and presents a bit more risk to the lender. 

Under power-of-sale, the bank or lender is still able to force the owner out and place the property up for sale.  However, the property is still in the owner's name and not the lender's.  As a result, any proceeds from the sale that exceed the debt and related costs (the lender's legal fees, mortgage penalties, interest, etc) should be paid to the owner.  That equity belongs to the owner and if the bank undersells the property, the owner has a legal case for loss and could sue them.

In other words, under power-of-sale the lender can not simply list the property for what it needs to cover its costs or it will be exposing itself to potential legal liability.  They must try to get a proper market value for the property. That means beginning with an appraisal (or sometimes two or three for solid evidence) and listing accordingly. 

An appraiser is going to try to be fair in determining the price, aiming for what they believe the fair market value is based on its current condition.  Many power-of-sale properties ARE cheaper than similar sized houses, but only because their condition tends to be worse as the owners were likely experiencing financial difficulty and may have put off needed maintenance.  But they're not a 'deal' in the sense of being under-priced.

There can also be variation in opinion from appraisers, as there is a degree of interpretation involved in the process.  I've personally had a buyer client make an offer on a power-of-sale property that we felt was more fair based on recent sales in the area, but the lender declined.  The listing agent confessed to me that he felt we were probably closer to the right price but they had had one high appraisal out of three, and they needed to give it some time on market to prove it wrong.  I kept an eye on the property and it eventually came down in price and sold a few months later for pretty much what we had offered in the first few days.

Anyways, I won't tell you not to look at properties listed under power-of-sale.  I just advise caution around market value and keeping realistic expectations.  Make sure you are working with an experienced real estate professional who will give solid advice on price when making an offer.


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