Since the economy took a turn for the worst, I have been inundated with requests for “bank sale” properties. A common misconception seems to exist where people assume that banks are basically giving away properties that are being foreclosed on, much like we see with the fire sale of properties in the U.S.
So, what is a “Bank Sale”? Basically when someone cannot meet their obligation to the bank/lender, the institution that they have financed their home through will begin a process to take the home away from the owner. This can be a fairly lengthy process and in some cases will ultimately end up with the bank or lender selling the home to try and recoup their losses.
While it is always possible to find a good deal in today’s housing market, it isn’t common for it to be a bank owned property. The rules and regulations that govern the Canadian banking system are far more stringent than the U.S equivalents (I use that term loosely, as they barely had any rules or regulations).
Obviously if someone defaults on their home financing (mortgage, line of credit) the bank would like to get that bad debt off of their books. If they recoup that money, they can in turn lend it to someone else! However, in Canada, regardless of how the lender goes about selling the property or what is owed on the property, under the Canadian Securities Act, a lender is mandated to achieve fair market value.
Fair market value is established in conjunction with local realtors. They provide the bank with local market data and recommend a fair list price. Every so often they may reduce the price but this reduction also has to be justified with relevant market data. The bank will keep extensive records of the sale process, just in case they end up in court.
So, for everyone watching American real estate shows and dreaming of the fortune you can make from buying and selling bank owned, I am afraid that it just isn’t realistic. That’s not to say there aren’t some great real estate opportunities for either a long-term investment strategy or to help you find that dream home.
Here are two such strategies that have proven very successful for our clients.
Alternative Option 1 – Power of Attorney instead of Power of Sale
Refocusing your search for Power of Attorney homes may be a great alternative to “bank sale” homes.
With an aging population, more and more seniors are moving on to retirement residences, senior’s communities, one floor condos or apartments. This opens up an entire market place of beautiful old homes in mature neighbourhoods. Do they need some reno’s? Sure they do but the end result can be magnificent and if you can buy at the right price you will end up with a lot of equity in your home.
A perfect example of this would be the Hunt Club area of London. A beautiful mature neighborhood that takes its name from the very exclusive golf course which part of the neighbourhood backs onto. Power of Attorney homes have been known to sell for as little as $300,000 and once renovated can be worth $399,000 or more.
A Realtor in your town will be able to not only find these listings for you but let you know what areas to look in.
Alternative Option 2 – Student Property
In London, Ontario, where I work, we are lucky to have two established further education establishments, Western University (formerly UWO) and Fanshawe College. Both of these institutions are growing at rapid rates making the need for housing ever-present.
Here is a case study that we completed for a client. The unit was a condo on the main bus route to UWO (5 min bus ride). We advised our client that paying condo fees in this instance is a good idea, because you are guaranteed that the outside of the property is taken care of, along with some large ticket items like the roof and windows (this varies from condo complex to condo complex).
Purchase Price – $189,000
Down-payment(20%) - $37,800
Mortgage Rate (as of May/2012) – 5 Yr Variable @ 2.8%
Land Transfer Tax (1 time payment) - $1,615
Legal Fees & Disbursements – $ 2,000
Rent Received – 5 Bedrooms @ $425 per room = $2,125 ($1700 if your child lives rent free)
Mortgage Payment – $620
Condo Fees – $177
Utilities – $250
Property Taxes – $180
Insurance – $55
Total Monthly Costs – $1,282
Rental Income – $2,125
Monthly Profit - $ 843
Gross Income – $10,116
Less 5% Vacancy Rate – $505.80
Less 5% Maintenance Reserve – $505.80
Less Legal Fees + Land Transfer Tax – $3,615 (Amounts paid on purchase of property)
Net Income – $5489.40
Gross Income – $10,116
Less 5% Vacancy Rate – $430.80
Less 5% Maintenance Reserve – $430.80
Net Income – $9104.40
So while “bank sales” may not be the best option in Canada, you can see that great opportunities still exist in our housing markets. You just need to know where to look.
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