Bank Sales In Canada ….. Not The Same As Bank Foreclosures In The U.S.A

House1 with Yardsign

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.

Before

kitchen  - before picture

After

kitchen - after picture

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).

House for sale

Purchase Details

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)

Monthly Costs

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

Year 1

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

Year 2

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.

Stewart Blair Realtor photo

Guest Post by: Stewart Blair is a Sales Representative for Prudential family Realty; brokerage. You can also find Stewart on Facebook and Twitter.

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Mr. CBB
I’m from the UK and now a recent permanent resident in Canada. I bought my first house at the age of 21 after University then my second at the age of 24. I’ve always been fascinated with personal finance, savings, learning to make money and watch it grow while combating debts along the way. Canadian Budget Binder is a place where I get to share my experiences with personal finance and learn about yours along the way. I hope you stick around and check me out on Twitter, Facebook and Pinterest where I am active on all social media sites. Cheers, Mr.CBB
Mr. CBB
Mr. CBB

Comments

  1. Those are pretty good numbers. When I went to university it sometimes made sense to purchase houses there, but now the prices are completely based on cap rates, so they are much, much less of a viable investment option.

  2. John S @ Frugal Rules says:

    We’ve seen a few of the bank sales in our area. In the end, I think the banks are going to do what they need in order to get that bad debt off of their books as soon as possible. It really does not surprise me that Canadian banking laws are more stringent than in the States, most things like that are.

  3. I always learn something new here CBB:)
    I never realized there was such a vast difference in the terms and processes of “bank sales” between Canada and the US!
    Thanks for sharing:)

  4. I agree with Anne. I live in a university town and the student housing by the university all have inflated prices based on cap rates. Rental properties can be a great source of income but you have to make sure you don’t over pay initially and factor in all of the upkeep costs.

  5. I was completely unaware that banks in Canada had to receive fair market value. I suppose that could have pros and cons. In my area a lot of homes are still depressed because the foreclosure rate is so high.

  6. Christine Weadick says:

    Almost 21 years ago we bought a house in a small town on a power of sale that a bank had foreclosed on. We had noticed this house in the paper a few months before. Then we noticed it had a new price…. $20,000.00 less than before so we had a look. We had to sell our then currant house first and there was an offer in on this place conditional on financing. We had a good agent and he told us that it was a power of sale and the earlier higher price had been the previous owners who had to get that amount to clear debts. As there was that offer in we kept looking but the agent kept us in the loop. The guy that put in the earlier offer had lost his job so there went his financing ….. that deal fell through the weekend we sold our other place. We were at the office the minute the doors opened Monday morning, and the secretary was typing up our offer while fielding calls from other interested parties….. we low-balled an offer with a later closing. The bank came back and said that if we wanted that closing they wanted more than the offered price. OK… we came up a little in price but 6 weeks on a closing date. They took it. We figured they were losing about $1000.00 a month with the house sitting empty. They had to pay to have the water shut off (it was winter), pay for heat and pay the guy down the street to come blow out the driveway every time it snowed at $20.00 a pop. So they faster the place sold the better for them. The place needed a LOT of work as the previous owners didn’t give a crap, they knew they were losing the house and they didn’t care. The usual rule is that anything that is physically attached to the building stays. Right…… They took a wood burning stove from the livingroom and I found out later they took a chunk of drywall from the wall in the basement because their son had drawn a life size drawing of a hockey goalie directly on the wall and they wanted to take it with them…. so they did. We found that you can get some great deals this way but you need to be aware of what is going on and why the house is up for sale……And don’t forget to change the locks as soon as you move in….

    • Good Lord, really they cut out the drywall. Nothing surprises me anymore. So what renovations did you end up doing and was it worth it in the end?

      • Christine Weadick says:

        Lets see…. The first thing we had to do was re-wire the whole house. We did the kitchen with cupboards and such from Home Depot. We built shelves, painted,wallpapered some rooms a couple of times. Put down carpet…. That was a disappointment, the carpet looked much better on the roll than on the floor and it wasn’t as nice a carpet as we had hoped. Hasn’t worn worth a crap. We did a lot of landscaping, that’s ongoing. Had to put a new roof on the garage, strip the paint off and re-paint it. It needed new doors. Needs another new roof now. The house got a new roof 3 years ago. We would like to replace the siding but can’t afford that so we painted the siding. When we did the roof we replaced a porch roof that the house used to have…. According to the people down the street. We’re working occasionally on doing the enclosed front porch over as there was water damage when the roof was being done. The whole house needs new floors. That won’t be happening any time soon. I get discouraged with the amount of work this house still needs…. Floors, windows, insulation, siding….. There are days I swear the only thing that will help this house is a bulldozer…. And I’d pay to drive it!!!!!! Was it worth it? Guess the last part of this message tells that one…. ….

  7. I am always fascinated in the difference in real estate laws in different areas. I think I was a realtor in another life.

  8. I work in a real estate office so the regulations surrounding foreclosure are perhaps a little more familiar to me than they might be to others. Buying a foreclosure has some good potential for profit BUT the rule of caveat emptor never applies more than with these purchases. Buyers need to be very well informed and to do very thorough research before making an offer on a property under foreclosure. Power of attorney and probate sales are usually a much less risky option and, in our area at least, more likely to provide you with a property into which you can build some equity.

  9. Who gets the difference between the foreclosed debt and the fair market value? If it goes to the owner who lost their home, that would seem fair. Why should you loose out on tens or hundreds of thousands of dollars you put into paying your loan just because you can no longer afford to do so?

  10. jefferson @SeeDebtRun says:

    I am not sure if that policy would be better or worse for banks.. It would certainly make homes a bit harder for them to sell, leading to a longer period of time before they could recoup their costs..

  11. Fascinating. I am not as familiar with real estate laws so this was very interesting to me. We also live in Canada and have looked at upgrading our home,renovating, or buying a different one. Not sure what to do but this info will definitely help. Thanks.

  12. What is the Canadian Securities Act? No fed legislation for securities in Canada. You mean provincial securities Acts?

  13. This article is very interesting… Being in the debt consolidation program, we see a huge similarity between Canada and the U.S. Enough to write an ebook on it hahaha. But with the housing, I didn’t realize some of the things you stated about with banked owned properties. Very interested… Thanks for the blog.

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