February 1st - 2011

Power of sale property must sell in “as is” condition

First you see that the lawn has not been cut and the weeds are taking over. Then you notice that the newspapers and mail are piling up on the front porch. The windows look dirty, and the house looks forlorn and neglected.

Note: This article has been modified from the original version.

First you see that the lawn has not been cut and the weeds are taking over. Then you notice that the newspapers and mail are piling up on the front porch. The windows look dirty, and the house looks forlorn and neglected.

These are possible signs that a house may have come under power of sale – but don’t be fooled. Even properties that look majestic and pristine, including homes in high-end neighbourhoods, can be subject to a power of sale.

Everything you ever wanted to know about power of sale and related issues and resources can be viewed in the OREApedia section of the OREA website – a section that’s easy to find because it’s the top menu item in the Members Only section of www.orea.com. Scroll down to “Mortgage Remedies, in particular Power of Sale” for more details.

A power of sale is a forced sale of a property by a mortgagee (a bank, financial institution or other lender) due to a default of one or more obligations by the mortgagor (owner or borrower) under the mortgage. The obligations include: paying principal and interest, paying municipal realty taxes, providing adequate insurance on the buildings, and keeping the property in good repair. When a mortgage goes into default, lenders have several options, and power of sale is just one of the legal remedies. OREApedia deals with the difference between power of sale and foreclosure and other mortgage remedies, things to be aware of when listing a power of sale property, and other issues.

“There’s a story behind every power of sale, and in many cases it’s a sad one,” says Lou Radomsky, an instructor and lawyer who has taught for the OREA Real Estate College since 1989. He was an instructor for a recent power of sale course as well as the creator of the original OREA course delivered over the years to hundreds of people across the province, from Thunder Bay to Cornwall.

“For investors or lawyers, real estate is a piece of paper or a business proposition, and in a number of instances, if it doesn’t work out, the investors walk away,” says Radomsky. “But owners have an entirely different relationship with the property. Power of sale is very personal to them.”

In some cases, people have put only five per cent down, but if the markets change and interest rates increase dramatically, which happened in the late 1980s and early 1990s – or if the owners lose their jobs or fall into deep debt – then they can’t carry the payments. It can happen with high-end properties too, he notes.

Radomsky deals with some 20 to 30 power of sale situations each year, he estimates. “My heart goes out to the individual in that situation, but there is another side to it as well,” he says. “The lender has put out money, and their money is at risk of being lost. Even though the lender is probably in a better financial position than the buyer, it’s still a loss, and that has implications too.”

Condominiums represent a large number of power of sale situations for Radomsky’s firm. Some buyers have a high-ratio mortgage or own several units and are barely able to make the mortgage payments, so they fail to pay the condominium maintenance fees. “The owners may already be fairly stretched, so they’ll pay the mortgage but not the condo fees, and that can lead to power of sale as well.”

When the economy moves into a recession, the number of power of sale situations tends to increase, he says, especially when jobs are scarce. In tough times, a disproportionately high number of home listings can be power of sale, he says, particularly in towns with one or two key industries hard hit by recession or company closings.

The condition of some power of sale homes can be very poor, he notes. In some cases, homeowners vandalize their own properties before vacating out of anger at their financial circumstances or other parties. He recalls one instance when the owners created a large hole in the second-storey bathroom floor that went right through the ceiling of the main-level bathroom, among other damages.

A power of sale can in fact end up costing much more than a resale, he says. Buyers who seek a power of sale situation may think they’ll get a great deal, but Radomsky warns that power of sale is not always an attractive proposition. “Many people have misconceptions about the value of a power of sale home,” he says. “It’s not always a good deal. Some people see it as an opportunity to take advantage of someone else’s misfortune, but fortunately, the courts hold the lenders to a higher standard, requiring them to get a fair price, and in fact the best price, for the property.”

The “as is” condition of a power of sale is crucial and can be an eye-opener for many buyers. The general effect of many clauses in the lengthy power of sale schedules required by financial institutions (and even in the less-lengthy OREA Standard Form 106) is that the seller/mortgagee makes no representations or warranties. The buyer purchases the property, fixtures and chattels “as is”; and the buyer agrees that the mortgagee does not accept any liability for the condition of the property. For all of these reasons, home inspection and property insurance conditions are essential, as are searches for outstanding work orders or deficiency notices.

While some lenders/sellers may permit conditions in power of sale offers, others may ask that offers be unconditional. In those cases, buyers may need to arrange for the inspection prior to making an offer as well as consulting with their insurers ahead of time. When in doubt, check with the lender/seller. Although sellers generally must disclose known latent defects that render a premise dangerous or unfit for habitation as an exception to “buyer beware” principle, even those types of defects are not likely to be known to the mortgagee selling under power of sale.

Although REALTORS® should have a general understanding and be able to answer basic questions from their clients about mortgage defaults, mortgage remedies (including power of sale) is a highly specialized and complex area of the law. Various advantages and disadvantages are associated with each of the remedies, and the lender’s lawyers can review these various options with their client.

It is dangerous for REALTORS® to give advice to clients or customers about mortgage defaults, mortgage remedies or mortgage remedy procedures. Section 8 of the REBBA Code of Ethics imposes an obligation on registrants to advise clients and customers to seek services from others if the registrant does not have the requisite knowledge, skill, judgment, competence or legal authority to provide such service.

Look to OREApedia for detailed information on this and 50 other topics of interest.

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Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246