Foreclosure – What a Bargain

by SebastianAlbrecht

Are foreclosure properties really a bargain, or is it just a stereotype?

Many home buyers consider foreclosures a great opportunity, but as the saying goes "all that glitters is not gold". Therefore, it's necessary to have an idea of how the process works and what the disadvantages and risks a potential buyer should be prepared for are. Without having done this kind of research you are likely to pay for something completely different from your expectations.

Have you ever heard of foreclosures? Those of you who are familiar with this term usually associate it with a bargain, which can be true. In some cases, however, all that's waiting for you is a very unpleasant surprise.

In Canada the rules are quite simple. If you as a homeowner fail to pay your mortgage to the lender for longer than three months, your home becomes the lender's property. This process is what we call "foreclosure." It starts with the lender sending you a notice asking you to pay your monthly payment.    

If you don't find a way out at this stage of the process, you are very likely to experience a flood of interest charges and legal fees which will have a considerable impact on your life, and eventually you'll have to move out. This, however, isn't the end of the hardships. At the point when the foreclosure is over and the lender/mortgagee becomes the absolute property owner, the property is usually listed for sale. The snag is that if the mortgagee doesn't get paid enough to pay off both the mortgage and all remaining costs, you are obliged to pay the remainder.

Types of foreclosure

The first type is known as "foreclosure by judicial sale," which means that the sale of the mortgaged property is supervised by a court. The foreclosure is initiated by the lender, who files a lawsuit against the mortgage borrower. The aim of this procedure is to recover the money owed without allowing the homeowner to settle the debt by means of a private sale.  

Foreclosure by power of sale is the second type that occurs in Canada (and also in the US). It's the faster alternative. Moreover, it's cheaper, since the process doesn't require court supervision. 

Buyers

Now that we have shed some light on foreclosures from the borrowers' point of view, we can have a look at potential buyers and their investments in this kind of property. The motivation for buying a foreclosed property is obvious, but as I mentioned, there are some risks everyone should be aware of.

First of all, you need to realize that you won't be making a deal with the property's original owner, but the banks, which is the lender. For this very reason, I'd definitely recommend you ask for help from somebody who's well versed in this type of transaction. As a Vancouver Realtor, I've dealt with foreclosed properties quite a few times, and I've noticed that buyers are often blind to the three most important features of this type of purchase. These disadvantages are the absence of a warranty on the property, too long of a process, and too little flexibility. I'll explain. If you buy a home without a warranty and find any defects later on, you simply have bad luck, since there's no option to complain. This, however, usually doesn't apply to power-of-sale foreclosures, because most of the properties are inspected. Then consider the length of the process. It involves many steps, therefore you should equip yourself with enough patience. If you'd like to become a home owner in a very short time, I'm afraid this is not the solution for you. Last but not least, the lack of flexibility is reflected mainly in a foreclosed property's price. The bank is not the sole actor in the transaction, which is why there's almost no room for negotiation.

Should you decide to give foreclosed properties a try despite the facts I presented in this article, I'd suggest collaborating with someone experienced in this area, setting realistic goals, and being patient.

Good luck!

Updated: 03/05/2013, SebastianAlbrecht
 
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Rose on 01/08/2014

Most home-owners never think about foreclosure and that it can happen after just missing a few payments. It's always worth building up a six month savings fund to tide you through periods of unemployment to avoid foreclosure.

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