Many homeowners take out a mortgage when they purchase their homes… and most keep up with their mortgage payments. But what happens when this doesn’t happen – when a homeowner falls short in coming through with those regular payments?
In Ontario, when mortgage payments are not made, the mortgage lender has the right to step in and take possession of the property. This can be done in two different ways: Power of Sale or Foreclosure. These two processes can result in very different outcomes for the homeowner. It’s important to know the differences.
What happens with a Power of Sale in Ontario?
In Ontario, when a homeowner or mortgage holder defaults on payments, the bank or lender can put up the home for sale, usually at or near market value, in order to recover the amount owed on the mortgage.
Home buyer vs. mortgage holder expectations
The buyer hopes to get a deal on the home. However, the mortgage holder wants to get market value for the property.
Who do you deal with in a Power of Sale?
In a regular home sale, the buyer would deal with the seller and their representative, usually their real estate agent. In a Power of Sale, the buyer deals directly with the lender, so the homeowner/seller may have less negotiating power as far as the property is priced.
What happens when the home sells under Power of Sale?
If the property sells for more than the outstanding amount of the mortgage, and there is money left over after all expenses and costs have been paid, the borrower may end up with a final equity payment from the lender.
If the property sells for less than the outstanding debt amount, the lender takes the loss. As well, commissions and fees may be negotiated by the lender to lessen their losses on the sale of the property and recoup as much of the outstanding debt as possible.
What are the risks when purchasing a Power of Sale property?
When a lender sells a property, it’s different that when the owner sells the property. When you sell your own property, you have to sign documents confirming that the utilities are up to date, the mortgages are going to be discharged, the appliances are working… and so on.
When you buy from a lender under a Power of Sale, you are given no warranties other than the property taxes have been paid. There are no warranties on the structure of the property, the appliances… anything.
So if you buy a home under a Power of Sale, while you usually get a better deal financially, underlying problems might not be discovered until after the purchase has been completed.
Reducing the Power of Sale risks
As a potential home buyer, when it comes to Power of Sale, what you see is what you get. And what you don’t see… well, you get it anyways. You may get a better price, but it also comes with risk.
To reduce the risk, you can add conditions to your offer that include a home inspection (which you will have to pay for) that may reveal problems with the property. It’s better to know everything you can about the property before you enter into negotiations. This may, in fact, allow your real estate agent to negotiate a better price on your behalf.
What happens to a property under Foreclosure in Ontario?
Whereas with a Power of Sale, the lender only has the right to sell the property, with a Foreclosure, the lender is able to take title of the property. This involves suing the borrower in court and waiting for the courts to issue judgment. Foreclosure is a much more onerous, time consuming and costly procedure than Power of Sale. The lender has to dot every “I” and cross every “T” in order to take title of the property and ensure that the former homeowner is not entitled to any future profits from its sale.
The good news is that if the value of the mortgage is much less than the value of the property, the lender is able to make a large amount of money using Foreclosure.
Key differences: Power of Sale vs. Foreclosure in Ontario
In summary, the key differences between a Power of Sale and a Foreclosure in Ontario are:
- In Power of Sale the lender sells the property; in Foreclosure the lender takes title of the property.
- In Power of Sale the former homeowner gets the excess profits from the sale of the property; in Foreclosure the former homeowner gets nothing.
- The Power of Sale process takes around 6 months. A Foreclosure can take over a year.
Howard Nightingale Professional Corporation, specialists in Power of Sale and Foreclosure in Ontario
If you are facing Power of Sale or Foreclosure, or considering either option as a lender or investor, we have the expertise to discuss all of the pros and cons with you; and help you determine the best option to protect your finances and/or grow your portfolio. You can reach our Toronto office at 416-663-4423 or toll free at 1-877- 224-8225. We look forward to helping you sort through the details and make the right decision.