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How to Buy a Foreclosed Home in Canada: 5 Important Steps

Generally speaking, foreclosed properties are those where an owner defaults to pay up the mortgage, and the lender then repossesses the property by applying to the court to transfer the property back to them so they can sell it and essentially pay back the loan originally taken out by the owners. 

Are you considering buying a foreclosed home? We’re sharing the step-by-step process of how to purchase a foreclosed home in Canada.  

Step 1: Understand the Options for Buying A Foreclosed Home 

The first step to purchasing a foreclosed home is to understand the different types of foreclosed homes. These can be broken down into four main categories:

Pre-foreclosure 

A pre-foreclosure home is one where the owner has defaulted on their mortgage payments, and there is a potential for them to be foreclosed on. Typically, the owner attempts to sell the home for a price low enough to ensure a quick sale. However, the bank or lender may intervene and reject the sale if the price is too low.

These technically are not foreclosure sales since the property is still owned by the original homeowners; however, they want to sell their homes before a potential foreclosure, also known as a short sale.  

Auction 

This is the traditional way to buy a foreclosed home. These auctions allow buyers to purchase a home quickly from third-party trustees that run the sales for banks or lenders. When trying to buy a foreclosed home this way, know what your budget is, sign up for the auction, and make your bid! 

Real Estate Owned (REO)

REO properties are owned by the lender and have not been sold at a foreclosure auction. Oftentimes the lender will hire a real estate agent to assist in putting the home on the market for sale.

Government-owned

These foreclosed homes are similar to REOs but are owned by government agencies who take ownership of homes when the owner defaults on a mortgage that is insured by the government. 

Step 2: Assess the Risks of Buying a Foreclosed Home

Unfortunately, purchasing a foreclosed home doesn’t come without risks. The following are some of the most common risks associated with buying foreclosure properties. 

Problems with the Property (Potential for lack of maintenance & cleanliness)

It is important to note that, typically, when you purchase a foreclosed home, you are buying it “as is.” Oftentimes foreclosed homes have been poorly maintained and may have structural issues. Further, disgruntled previous owners may cause damage to the home and theft or vandalism can occur before you gain possession. Since there is no one on the “seller’s side” to pay for repairs, cleaning, or obtain necessary permits prior to the purchase, you will be responsible for these costs.

Hidden Costs

These hidden costs can include back taxes or liens on the property. The property might not be habitable, chattels could be missing, broken, and or substantially different from when you first viewed it. There could be violations of restrictive covenants, defects, encroachment issues, health hazards, and other issues that need to be dealt with and therefore, can bring up the total you are paying for the property altogether.

Slow Process & Time Delays

This is due to the fact that the sale and purchase of a foreclosed home is usually quite complicated and has strict procedures that need to be followed.

Repairs 

Most foreclosed homes are in need of (at least) some basic maintenance and upkeep. These repairs and maintenance fees should be part of your budget when thinking of buying a foreclosed home.

No Guarantee of Obtaining a Real Property Report (RPR)

When you purchase a foreclosed home, there is no guarantee that you will obtain a compliant Real Property Report. If the vendor has an RPR on file, they will produce it, but they are unlikely to provide an updated RPR if there have been changes to the property since the last survey.

Less flexibility with negotiations

Buying a foreclosed home is known to not have a lot of wiggle room in regards to negotiating and, therefore, set your expectations accordingly. 

Step 3: Get Preapproved for a Mortgage 

Getting preapproved is always a good idea when looking to buy a new home. During this process, a lender will take a look at your credit, income, and debt to calculate how much of a mortgage you can take on. Having your personal and financial documents updated, paying outstanding debts, and having savings for a substantial down payment will help you get approved for a mortgage. This way, with a pre-approval, you can look at homes that will realistically fit in your budget and also make you seem like a more serious candidate to the repossessing lender! However, although a pre-approval is important, remember that you will need full approval once your offer on a home has been accepted.  

Step 4: Consult The Experts  

Real Estate Agents  

These experienced real estate agents have access to multiple listings at once and can help you find a foreclosed home. They will help you navigate the market as well as the unique process that is buying a foreclosed home. Real estate agents have a good understanding of the market and can advise you on common real estate issues.

Home Inspectors   

Make sure you include a home inspection in your offer on a foreclosed home (you won’t be able to do this when buying a foreclosed home at an auction.) This way, you can hire an expert to inspect the home before you buy it and can therefore be advised on the state of the home, potential mechanical and structural problems, repairs, and expenses. Based on their report, you will have a better idea of what you’re getting yourself into and, if needed, can walk away from purchasing the home.   

Real Estate Lawyers  

It is always in your best interest to use a real estate lawyer for these transactions. A lawyer will review all the documents and the entire foreclosure process as a whole to help it run smoothly and in your favour. Similarly, lawyers can explain how buying a foreclosed home differs from a regular residential home purchase, including the added risks.

Step 5: Determine the Value of Your Investment 

Research the value of the property, potential repair costs, and what the value could be potentially after putting in some work. Will the value ultimately be worth it? This is another aspect of buying a foreclosed home that a real estate agent could advise you on.

Your foreclosed home is a deal if the initial purchase price and the renovations/repairs cost less than its potential market value, so make an offer you know you can profit from in the future!

Buying a Foreclosed Home? Navigator Law Can Help! 

If you’re interested in foreclosure properties and want a lawyer to help you through the process of purchasing a foreclosed home, Navigator Law is here to provide you with the legal assistance you need. We’ve helped numerous clients streamline their foreclosure purchases for multiple types of foreclosure. Contact us today to learn more.