Buying a Foreclosure Property
Buying a foreclosure property is a complex endeavor. Four points to remember:

1. The court is the seller.
2. The court has never owned or lived in the property.
3. The court cannot nor do they have any desire to warrant something over which they have no knowledge or control.
4. The foreclosure process only touches the real estate.

The standard AREA (Alberta Real Estate Association) contract is subject to severe modification. Many standard items are deleted.

The first to go is any reference to chattels. In other words, any reference to freestanding items such as fridges, stoves and garage door openers is deleted. The foreclosure process only relates to the land and that is all that can be offered for sale. Since this sale is not under the control of the owner, chattels cannot be included.

The second major area struck from the standard contract is the provisions dealing with the deposit. The deposit is paid into court and governed by the court process. The rules for dealing with the deposit are covered by the court order in court listing process.

The next item to go is the usual provisions regarding the closing process. Once again this is covered by the court order.

Finally, anything to do with warranties is struck from the contract. Remember the court has no desire to warrant something over which they have no knowledge or control so they will not warrant compliance or lack of encroachments or any other item. This includes production of the Real Property Report in support of the warranties. Often, if the lender has an RPR on file they will produce it. If they don’t, they won’t. If the property has changed they will not provide an updated RPR.

This all goes back to this single point: who is selling the property?

What about the price and the offer?

So, what does a foreclosure property mean for any potential buyer or their Realtor ?

First and foremost, it means a lower price. With none of the usual warranties the price is typically much lower. If it turns out there is no permit for the garage or deck or even the house the buyer is stuck. The buyer must deal with this. Likewise, any other deficiencies such as missing appliances are typically at the risk of the buyer. All of this dictates a much lower price.

Before making an offer make sure you know that if there is no permit in place for the garage or deck you cannot force the seller to get one. If the basement is leaky there is nothing you can do.

Make sure, if you are the buyer or Realtor, your inspection is thorough. In many cases you will have access to the property to allow a professional inspector opportunity to look at the property. In many cases you will not. As a buyer or Realtor look more carefully than you would otherwise.

When submitting an offer make sure it is unconditional. The court and the lender’s lawyers will not engage in a negotiation process. Their first preference is a clean unconditional offer.

Finally, pay attention to the court order when drafting and submitting an offer to buy. Purchasing a foreclosure property can be a great opportunity, however, it is a potential landmine for anyone who is not careful.

About the author: Stan Galbraith is a lawyer with over 25 years of experience.  He was admitted to the Alberta Bar in 1983 and has operated his own law office since 1988. Stan has a wealth of experience ranging from litigation and appeal work, to teaching and writing. He has now left the world of litigation behind and works with commercial and residential Realtors and their clients on closing their transactions. He also practices extensively in the areas of small business and wills and estate planning and administration. You can find his website at www.galbraith.ab.ca.

Mortgage Insurance
The only time the courts issue an order for foreclosure is when there is little or no equity in the property. Even then, it is only done when the lender requests it and most times they would rather have the property sold under the court process. First, most lenders are not in the business of owning real estate. Second, they require a sale so they can quantify their shortfall, if any. This allows them to make a claim under the mortgage insurance policy.

Any time an owner obtains a high-ratio mortgage from a bank or other public lender they must pay for mortgage insurance. A high-ratio mortgage is defined as the mortgage for in excess of 75% of the value of the property. The mortgage insurance is there for the protection of the lender, not for the protection of the owner. In the event of a foreclosure and a sale by the bank at a loss (after payment of the mortgage, all interest, any real estate commissions and all costs of the foreclosure process) the bank will make a claim under the mortgage insurance policy. The bank will recover their loss and break even.

The mortgage insurance company will then seek reimbursement from the property owner for the amount they have paid out to the lender. Although liability under a mortgage does not continue once the property is sold, liability under the mortgage insurance policy does continue. In other words, if someone sells a property and the new owner defaults on the mortgage the original owner can end up with a judgment against them for the full value of the lender’s loss.

In the early 1980s many people in Alberta ended up with a judgment against them for thousands of dollars. This was especially painful where they had sold the property with the belief and understanding the new owner would look after the mortgage. In one case, I dealt with a client facing a judgment in excess of $15,000. They had sold the property to new owners who had subsequently resold the property to a third party. The final owner defaulted and left the property in a mess. The lender sold the property at a loss and obtained judgment against six people; all three couples who had owned the property since the mortgage was granted. The mortgage insurance company went after the first owners as they had the greatest ability to pay the judgment.

About the author: Stan Galbraith is a lawyer with over 25 years of experience.  He was admitted to the Alberta Bar in 1983 and has operated his own law office since 1988. Stan has a wealth of experience ranging from litigation and appeal work, to teaching and writing. He has now left the world of litigation behind and works with commercial and residential Realtors and their clients on closing their transactions. He also practices extensively in the areas of small business and wills and estate planning and administration. You can find his website at www.galbraith.ab.ca.

Court Ordered Sale
Once the redemption period expires the court will issue an order directing the sale or other disposition of the property. This is the point at which the owner has lost control over the ability to sell the property.

What do you do if the law firm controlling the foreclosure says you cannot list the property for sale? Ask for paperwork to establish the status of the lawsuit.

As a matter of historical interest, many of the protections afforded to owners go back to the days of the Social Credit party. During the tenure of William Aberhart and Ernest Manning there was a perception in Alberta that the ‘big bad eastern banks’ were out to get the small time farmers and business people and they must be stopped. Laws were enacted to provide property owners protection against the immediate loss of their property. Owners were given time to put their affairs in order and banks had to satisfy the court on several issues.

The laws were amended once again in the early 1980s to deal with some of the issues that arose when real estate crashed and there were a multitude of foreclosures. At that time many people found they had negative equity in their home. They would then sell the property for one dollar to a buyer who promised to take over the existing mortgage. That buyer would rent the property, make no payments on the mortgage and pocket all the profit. The response of the Alberta government was to dramatically tighten the foreclosure process where the bank can show there is no equity in the property.

There are several ways a sale can happen. If the court has ordered a sale through a realtor it will be listed on MLS. Once this happens the owner has lost their power to choose their own realtor. They property is now listed by the court process and the owner cannot also list the property. It cannot be listed twice.

Sometimes, there will be a Judicial Sale by posting the notice of sale in the courthouse for a brief period of time. This is typical where there is little or no equity in the property. In this case the court is still in control of the sale process and the owner cannot sign their own listing agreement with a realtor of their choice. It is important to contact the lawyer or legal assistant looking after the foreclosure. The owner and their potential new realtor must determine whether they have the right to sell the property even where there nothing to indicate this.

About the author: Stan Galbraith is a lawyer with over 25 years of experience.  He was admitted to the Alberta Bar in 1983 and has operated his own law office since 1988. Stan has a wealth of experience ranging from litigation and appeal work, to teaching and writing. He has now left the world of litigation behind and works with commercial and residential Realtors and their clients on closing their transactions. He also practices extensively in the areas of small business and wills and estate planning and administration. You can find his website at www.galbraith.ab.ca.

Every owner has a ‘right of redemption’. The standard time for a ‘right of redemption’ in Alberta is six months. The owner is given six months after the lawsuit is started to redeem the mortgage or pay any arrears and put it back in good standing.

This redemption period can be shortened if there is little or no equity in the property or if the mortgage has matured.

When the bank’s lawyer goes to court to obtain the order allowing the sale of the property they will also file an appraisal. That appraisal will typically show three values for the property. The first value is the fair market value or the price that an owner can expect to receive on the open market if there is no urgency to sell. The appraisal will then list a forced sale for terms and forced sale for cash value. This is the price an owner can expect to receive if there is urgency to sell and the property must be sold within a certain limited timeframe. Typically the forced sale values are 10% to 15% lower than the fair market value.

If the difference between the amount owing on the mortgage and the forced sale value is positive the court will grant a period of time during which the owner can either sell the property or put the mortgage back in good standing. The court will look at the expected interest that will accrue over the next few months, the costs of the foreclosure and any anticipated real estate commissions to determine whether there is sufficient equity. Where the equity will be eaten up by interest costs in a short time then the court will order an immediate sale.

As an owner, if the appraisal from the bank shows little or no equity you have the option of obtaining your own appraisal that shows a higher price. You can use this to argue for a longer time in which you can sell a house or put the mortgage back in good standing.

If the mortgage has matured then it does not matter how much equity is in the property. The lender is immediately entitled to an order allowing for sale of the property.

About the author: Stan Galbraith is a lawyer with over 25 years of experience.  He was admitted to the Alberta Bar in 1983 and has operated his own law office since 1988. Stan has a wealth of experience ranging from litigation and appeal work, to teaching and writing. He has now left the world of litigation behind and works with commercial and residential Realtors and their clients on closing their transactions. He also practices extensively in the areas of small business and wills and estate planning and administration. You can find his website at www.galbraith.ab.ca.

Stan's extensive experience and insight into real estate is top notch in this blogger's humble opinion. I have always been impressed with the thoroughness and professionalism he exhibits when represnting his clients.

What is a foreclosure?

It is a lawsuit just like any other. Filed at the same place with the same filing fee and the same form. What makes it different is the relief. Instead of asking for a judgment for money, the primary request is an order of foreclosure.

Black’s Law Dictionary says foreclosure is “to shut out, to bar, to destroy an equity of redemption or a termination of all rights of the mortgagor in the property covered by the mortgage.”

In an order for foreclosure the court directs the Land Titles Office to put the land in the name of the lender subject only to prior encumbrances.

A final order for foreclosure is rarely issued. The courts in Alberta and provincial legislation provide protection to owners so they can either sell the property themselves or have it sold on the open market. If it is sold on the open market, any money in excess of what is owed on the mortgage is paid to the owner.

How Does It Start?

The first thing that happens is a demand letter. This is where the lawyer writes a letter to the homeowner that says “pay up the arrears or else we are going to sue and take the land away from you.” This may be when the owners finally wake up to the fact they have issues that must be dealt with. They will then phone their Realtor. At this stage the owner still has complete control over the property. They can list the property for sale and it is no different than any other listing, except for the urgency to get it sold. Of course once the listing starts, the lawsuit could start any time after that so there is an additional level of due diligence required from both the owner and the Realtor.

The next step is the Statement of Claim. In other words, the lender is now suing the owner. When the lender does this they will always file a document against title called a Lis Pendens. This is Latin for "litigation pending." When you pull a copy of title and see a Lis Pendens you know the lawsuit has been started.

Now the owner and the Realtor must be careful what they do. If the foreclosure lawsuit has progressed far enough the owner may not be able to list the property for sale. Any owner or Realtor can pull a copy of the Lis Pendens and find out the name of the lawyer who is doing the foreclosure. You can then phone the lawyer or the legal assistant and find out the status of the lawsuit. When placing this phone call ask for the legal assistant that is looking after the foreclosures for this particular lawyer. Their hourly rate is much lower than the lawyer and they will often know more about the particulars of what is going on the file than the lawyer. Foreclosure lawyers typically bill on an hourly basis for all the work they do. Avoiding phone calls directly to the lawyer will lower the costs of the entire foreclosure process.

At the early stages of the lawsuit the owner can still sign a listing agreement with the owner and carry on as usual. Both the owner and the realtor must check with the lawyer to make sure the foreclosure has not progressed too far.

Other topics covered in this series will include: The Redemption Period, Court Ordered Sale, Mortage Insurance, Buying Foreclosure Property, and Offer and Price.

About the author: Stan Galbraith is a lawyer with over 25 years of experience.  He was admitted to the Alberta Bar in 1983 and has operated his own law office since 1988. Stan has a wealth of experience ranging from litigation and appeal work, to teaching and writing. He has now left the world of litigation behind and works with commercial and residential Realtors and their clients on closing their transactions. He also practices extensively in the areas of small business and wills and estate planning and administration. You can find his website at www.galbraith.ab.ca.

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