Power of Sale
Navigating Risk and Reward in Power of Sale Deals
In recent times, the surge in interest rates has placed a considerable strain on homeowners who are approaching mortgage renewal. Many of these homeowners initially purchased their properties during a period of low mortgage interest rates, only to face a significant spike in interest rates a few years later. Consequently, some homeowners find themselves grappling with substantially increased monthly mortgage payments. Unfortunately, this financial pressure may lead to situations where homeowners are unable to meet their mortgage obligations, putting their homes at risk of being sold under Power of Sale by the lender.
What is Power of Sale?
Power of Sale is a legal process initiated by a lender when a homeowner defaults on their mortgage. This process allows the lender to sell the property in order to recover the outstanding mortgage debt. For potential buyers, a property listed under Power of Sale can be an attractive prospect due to the potential for cost savings. However, it’s crucial to understand that this option is not without its risks, which we’ll explore in detail.
Buying from the Lender, Not the Owner
When purchasing a property under Power of Sale, you are buying the property directly from the lender, not from the registered owner. Furthermore, the Agreement of Purchase and Sale (APS) for such properties typically contains clauses that heavily favor the lender, and these clauses are usually non-negotiable. These clauses can introduce various risks for buyers. Let’s delve into some of these potential risks:
1. Right of Redemption
A lender may include a clause in the APS that allows the defaulting homeowner to bring their mortgage back into good standing at any time before the closing date. This means the homeowner could retain the property, even after a buyer has entered into a valid and binding APS. While it’s rare for homeowners to redeem the mortgage, buyers need to be aware that this possibility exists and could impact their ability to purchase the property.
2. Property Condition “As Is”
Properties sold under Power of Sale are typically sold in an “as is” condition. This means that the lender provides no assurances regarding the state of the property. To mitigate this risk, buyers should consider making their offer conditional on a home inspection to uncover any significant defects before finalizing the purchase agreement.
3. Lack of Warranties or Representations
In standard property transactions, sellers often provide warranties and representations regarding the property’s condition. However, when buying under Power of Sale, the lender does not provide any warranties or representations. This means that appliances or chattels may not work, and the buyer has no recourse for any issues. Additionally, items seen during property viewings may not be present on the closing date if they were financed with a third party.
4. Title Issues
In some cases, properties sold under Power of Sale may have title issues that would typically be resolved in a standard transaction. Buyers usually acquire the property’s title “as is,” which may result in them not having a clear and marketable title. These title issues could include encroachments, easements, or other matters affecting property ownership.
5. Title Insurance Considerations
While title insurance policies are available for properties sold under Power of Sale, buyers should be aware that there may be exclusions or exceptions in the coverage. These exceptions could result in the title insurance company denying a claim if the buyer assumed certain risks when purchasing the property. For instance, outstanding permits or work orders, water bills, or property tax arrears might not be covered.
Given these risks, it’s crucial for buyers to engage an experienced real estate lawyer to review the APS before making an offer on a property under Power of Sale. While purchasing such a property can lead to significant cost savings, it’s essential to navigate these potential pitfalls with care and expertise. An experienced legal professional can help buyers understand and manage these risks effectively.