How a property goes from its current owner to being owned by the Lender (or Insurer) is a lengthy and some what laborious procedure. The process involves the legal system and they aren’t known for simplifying anything! If you would like to read up on the process or are suffering from insomnia you can click on the button below.
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The rest of this article is more to guide people who are interested in purchasing a foreclosed property.
Number one, don’t make ridiculous offers, you’re not at a garage sale! If you had your house for sale would you take an offer of half price or lower? Remember, the sellers have an obligation to their shareholders and to Canadian homeowners, in CMHC’s case their shareholders are the Canadian taxpayer. Lenders and mortgage insurers are businesses, RBC had a profit of 12.87 billion in 2019! The insurers, CMHC had a net income of 1.4 billion in 2018, Genworth had a net income of 426 million in 2019. They don’t achieve these numbers by being frivolous with their decisions and giving away properties. They also have an obligation to the Canadian homeowner, would you be happy if they sold the house next to yours for 80% of market value?
When you watch a TV show where the “buyer” says, “we got this $300,000 house for $200,000!”
They didn’t, they got a $200,000 house for $200,000, in fact they probably got a $180,000 house for 200,000!
Can you get a deal on a foreclosed property? Yes, but you’re going to have to be patient.
The seller will ask their REALTOR® to provide them with a CMA (comparative market analysis). A CMA is an estimated price range that a property will sell for. (CMA explained) The seller will take this CMA into consideration but they usually list the house at a price slightly under what it was last listed for. For example, if a property was previously listed at $250,000 the seller will probably start at $240,000, even if the CMA suggests a price range of $200,000 – $220,000!
If the property doesn’t sell, the seller will ask for a property report every 30 to 90 days, this time range depends on the policies of the seller. After each one of these reports the seller will generally lower the price and this will go on until the property sells.
Do all foreclosures need a lot of work? No…….. I’ve seen some that need no work. Generally speaking though, they are going to need some work. Think about it, if the previous owner wasn’t keeping up with their mortgage payments, chances are they weren’t keeping up with the maintenance of the home either!
If you’re going to buy a foreclosed property, you or someone you know, should have an in-depth knowledge of houses and/or a real estate agent that does as well! Foreclosed properties are sold “as is”, “where is” and the seller requires the buyer to sign a document called an addendum. The addendum contains multiple clauses and vary in length from 1 page to 19 pages! These clauses vary from seller to seller and it’s important that your REALTOR® goes over these with you and explains them to you. Some sellers won’t let you turn the water on for a home inspection. CMHC requires the potential buyer to have a professional plumber de winterize and re winterize the plumbing if you’re having a home inspection. To simplify, the Addendum on a foreclosure is “buyer beware”. The seller has never lived in the property, they know nothing about the property and they are not guaranteeing anything about the property. For example, if you bought a house from a seller that lived in the house and they didn’t disclose an issue with the foundation (Latent Defect) that they were aware of, you could take them to court for costs. With a foreclosed property, you have no recourse..”as is”!
You are allowed to have inspections done on foreclosed properties, but if the inspection finds an issue with the foundation, moisture problems, mold, asbestos, or any other high cost defect, the majority of sellers are not going to re negotiate the price! Now you have spent $400+ on inspections, that is why you or someone you know should have in depth knowledge of what to look for when purchasing one of these properties. Having a real estate agent that is experienced with foreclosures, that can guide you through this process, can save you hundreds if not thousands of dollars!
Before we move on from the addendum, know that it can’t be altered! The sellers have designed it this way to protect themselves, they’re not going to change it. I have had agents submit offers with sections of the addendum crossed out, they seller will just reject the offer!
The next point is, how long to leave to offer open for. This varies from seller to seller but is usually somewhere between 3 – 5 business days. The reason for this is, the sellers or the companies acting on their behalf are usually dealing with multiple properties and your offer could be 2nd in line or 20th. To clarify, business days are Monday through Friday, 9-5. I have had offers submitted Friday at 7:00 pm and left open until Monday at 7:00 pm, that is 1 business day! Why is this important? If another potential buyer submitted an offer Friday at 9:00 pm and left their’s open until Wednesday at 7:00 pm, they could end up getting their’s accepted. If the sellers didn’t have time to respond to your offer by Monday at 7:00 pm, yours has now expired!
That leads into my next point, contract law! I can’t say that all sellers or their representatives are extremely particular regarding the accuracy of the contract, but CMHC certainly is! If your Offer to Purchase and/or your addendum are not filled out correctly, you increase your chance of your offer being rejected!
Is there money to be made buying and selling foreclosed properties? Yes!
Is there money to be lost buying and selling foreclosed properties? Yes!
So how do you make money on foreclosed properties? It’s a calculated risk, the more research, and the more knowledge you have will determine whether you make money or lose money. There are so many factors involved that you really need a trusted advisor, a knowledgeable REALTOR®, yourself or someone you know with an in depth understanding of house construction and the current real estate market.
Things to consider:
- What is the resale value of this property?
- How much will you have to spend to get the most value?
- Do you understand all of the issues of the property?
- What price do you need to pay for this property to make a profit?
- What is the state of the current real estate market? Is it moving up or down?
Having the answers to these questions will increase the chances of you making money on buying a foreclosure. The most difficult way to make money on a foreclosure is to buy it, renovate it and then resell for a profit. This method requires knowing the correct answers to the above questions. It also requires you having the expertise to do a lot of the renovation work yourself and doing it close to professionally. You could hire professionals to do the work for you but your profit margin will shrink or disappear!
The best methods of turning a profit, in my opinion are:
- Buying it, renovate it and live in it. This way you have a place to live and over time, it will increase in value.
- Buying it, renovate it and rent it out. This way you have someone else paying your carrying costs (or more) and over time, it will increase in value.
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